As per section 10(10C), any compensation received at the time of voluntary retirement or termination of service is exempt from tax, if the following conditions are satisfied:
Compensation is received at the time of voluntary retirement or termination (or in the case of an employee of public sector Company, at the time of voluntary separation).
Compensation is received by an employee of following undertakings
a) public sector company ; or
b) any other company ; or
c) an authority established under a Central, State or Provincial Act ; or
d) a local authority ; or
e) a co-operative society ; or
f) a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956 (3 of 1956) ; or
g) an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961) ; or
h) any State Government; or
i) the Central Government; or
j) Notified institutes having importance throughout India or in any State or States,
k) Notified institute of management
Compensation is received in accordance with the scheme of voluntary
retirement/separation, which is framed in accordance with guidelines prescribed under Rule 2BA of Income-tax Rules, 1962*.
Maximum amount of exemption is Rs. 5,00,000.
Where exemption is allowed to an employee under section 10(10C) for any assessment year, no exemption under this section shall be allowed to him for any other assessment year.
With effect from assessment year 2010-11, section 10(10C) has been amended to provide that where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under section 10(10C) shall be allowed to him in relation to such or any other assessment year.
*Guidelines prescribed under Rule 2BA of Income-tax Rules. 1962
Voluntary retirement scheme should be framed in accordance with the following guidelines:
i. it should apply to an employee who has completed 10 years of service or completed 40 years of age. This requirement would not be in case of amount received by an employee of a public sector company under the scheme of voluntary separation framed by such public sector company.
ii. it should apply to all employees (by whatever name called) including workers and executives of a company or of an authority or of a co-operative society, as the case may be, excepting directors of a company or of a co-operative society;]
iii. the scheme of voluntary retirement or voluntary separation should be drawn to result in overall reduction in the existing strength of the employees;
iv. the vacancy caused by the voluntary retirement or voluntary separation is not to be filled up;
v. the retiring employee of a company shall not be employed in another company or concern belonging to the same management
vi. the amount receivable on account of voluntary retirement or voluntary separation of the employee does not exceed the amount equivalent to
- 3 months salary* for each completed year of service or
- salary at the time of retirement multiplied by the balance months of service left before the date of his retirement
*Salary for this purpose will include basic salary, dearness allowance, if the terms of service so provide and commission based on fixed percentage of turnover achieved by the employee.