Introduction:
Where the compensation is received during the period of voluntary retirement, or in cases of separation, the earnings received as compensation are tax-free if all the conditions listed below are met-
•Compensation must be paid upon an individual's choice of retirement or separation.
•An employee receives compensation as an employee through the following sources:
1.an authority established pursuant to Central, State or Provincial Act;
2.Local authority;
3.university;
4.and Indian Institute of Technology;
5.of the State Government;
6.of the Central Government;
7.an institute that is notified and has significance across India or in any state (ie. International Crops Research Institute, semi-arid Tropics; Action for Food Production, New Delhi, Government Tool Room & Training Centre, Rajaji nagar Industrial Estate, Bangalore);
8.Notified institute of management (ie., Indian Institute of Management, Ahmedabad, Bangalore, Calcutta or Lucknow and the Indian Institute of Foreign Trade, New Delhi);
9.Public sector companies (also known as
10.any co-operative or commercial society or co-operative.
•Exemption maximum is Rs 5,00,000.
•If an exemption has been granted to an employee in any assessment year in accordance with section 10(10C) the exemptions under section 10(10C) shall be granted to him for another assessment year. So, exemption u/s 10(10C) is granted only one time.
Guidelines to be followed
There are guidelines for the purposes in section 10(10C) which are set out by Rule 2BA. The retirement scheme for voluntary retirement should follow the following guidelines, which are:--
•it is only applicable to employees who have completed the 10 year service requirement or have reached their 40th birthday (this condition is however not applicable if the amount was paid during the time of a voluntary separation with a government sector firm).
•It is applicable to all employees, employees and executives of a concern, with the exception of directors of a business or co-operative society.
•The scheme of voluntary separation or retirement has been established for the purpose of reducing the current strength of employees.
•The vacancy resulting that results from the separation or retirement of a voluntary employee cannot be filled, nor is the employee who is retiring should be employed in a different firm or in any other business with similar management.
•The amount that is required to be paid upon the separation or voluntary retirement of the employee, do not exceed the amount as equal to three months' salary for each year of service, or monthly emoluments on the day of retirement, multiplied by the months of service that remain prior to the date of retirement from superannuation, or which ever is greater.
Summary
The section states that any amount received as compensation is exempted under the Income Tax Act, 1961 meaning that the same amount will not be considered in the calculation of tax on income for this particular person when the conditions above are met.
