My client's factory closed and he was paid retrenchment compensation. How much is exempt, and is there any way to get the whole of it out of tax?
Section 10(10B) exempts compensation received by a workman at the time of his retrenchment under the Industrial Disputes Act 1947 or under any other Act, rules, orders, notifications, standing orders, award, contract of service or otherwise, but the first proviso caps the exemption at the lower of two figures — the amount calculated under clause (b) of section 25F of the Industrial Disputes Act, and such amount, not being less than fifty thousand rupees, as the Central Government may specify by notification. There is one way to escape the cap entirely: the second proviso disapplies the first where the compensation is received in accordance with a scheme approved by the Central Government having regard to the need for extending special protection to the workmen in the undertaking to which the scheme applies.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2025-04-01, reported as Income-tax Act, 1961, s.10(10B), as printed on the departmental Year 2025 and Year 2019 (No. 1) pages. It bears on section 10(10B), section 17(3), section 17(3)(i), section 17(3)(ii), section 10(10C) of the Income Tax Act 1961, in Salary & Perquisites and Capital Gains Exemptions matters.
Three features of this clause decide most cases. The first is the Explanation, which is doing quiet but heavy work: compensation received at the time of the CLOSING DOWN of the undertaking is deemed to be compensation received at the time of retrenchment, and so is compensation received on a TRANSFER of the ownership or management of the undertaking — but only if one of three conditions is met, namely that the service was interrupted by the transfer, or that the terms and conditions after the transfer are in any way less favourable, or that the new employer is legally not liable to pay retrenchment compensation on the footing of continuous uninterrupted service. A transfer that preserves continuity of service on identical terms therefore falls outside the clause. The second is the definitional carry-over in clause (c) of the Explanation: "employer" and "workman" bear the meanings they have in the Industrial Disputes Act 1947, so an employee who is not a "workman" within that Act — the supervisory and managerial exclusions in section 2(s) — is outside s.10(10B) altogether and must look to s.10(10C) or to s.17(3) instead. The third is the second proviso, which is the only route to a full exemption and is worth checking whenever a large closure or restructuring package is on the table; it requires an approval by the Central Government of the scheme, not merely an approval of the closure. Note finally the relationship with s.17(3)(i): compensation received at or in connection with the termination of employment is profits in lieu of salary and therefore chargeable, and s.17(3)(ii) expressly carves out payments referred to in clause (10B) of section 10 — so what s.10(10B) does not exempt remains fully taxable as salary.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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As printed on the Year 2025 departmental page, clause (10B) of section 10 reads: any compensation received by a workman under the Industrial Disputes Act, 1947 (14 of 1947), or under any other Act or Rules, orders or notifications issued thereunder or under any standing orders or under any award, contract of service or otherwise, at the time of his retrenchment : Provided that the amount exempt under this clause shall not exceed— (i) an amount calculated in accordance with the provisions of clause (b) of section 25F of the Industrial Disputes Act, 1947 (14 of 1947); or (ii) such amount, not being less than fifty thousand rupees, as the Central Government may, by notification in the Official Gazette, specify in this behalf, whichever is less : Provided further that the preceding proviso shall not apply in respect of any compensation received by a workman in accordance with any scheme which the Central Government may, having regard to the need for extending special protection to the workmen in the undertaking to which such scheme applies and other relevant circumstances, approve in this behalf. The Explanation provides that (a) compensation received at the time of the closing down of the undertaking is deemed to be compensation received at the time of retrenchment; (b) compensation received at the time of the transfer, whether by agreement or by operation of law, of the ownership or management of the undertaking to a new employer is deemed to be compensation received at the time of retrenchment if the service of the workman has been interrupted by the transfer, or the terms and conditions of service applicable after the transfer are in any way less favourable than those applicable immediately before it, or the new employer is legally not liable to pay retrenchment compensation on the basis that the service has been continuous and uninterrupted; and (c) the expressions "employer" and "workman" have the same meanings as in the Industrial Disputes Act, 1947.
Retrenchment compensation received by a workman is exempt under s.10(10B), but only up to the lower of the amount calculated under clause (b) of section 25F of the Industrial Disputes Act 1947 and the amount specified by the Central Government by notification, which the clause requires to be not less than fifty thousand rupees. Where the compensation is received in accordance with a scheme approved by the Central Government under the second proviso, the cap does not apply at all. The Explanation extends the clause to compensation on the closing down of an undertaking, and to compensation on a transfer of ownership or management only where one of three specified conditions is satisfied, and it imports the Industrial Disputes Act meanings of "employer" and "workman".
Not applicable — this is a statement of statutory text taken from two departmental editions of section 10. No judicial reasoning is involved.
(ii) such amount, not being less than fifty thousand rupees, as the Central Government may, by notification in the Official Gazette, specify in this behalf, whichever is less :
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Handle my notice → Ask a CA on WhatsAppSection 10(10B) exempts compensation received by a workman at the time of his retrenchment under the Industrial Disputes Act 1947 or under any other Act, rules, orders, notifications, standing orders, award, contract of service or otherwise, but the first proviso caps the exemption at the lower of two figures — the amount calculated under clause (b) of section 25F of the Industrial Disputes Act, and such amount, not being less than fifty thousand rupees, as the Central Government may specify by notification. There is one way to escape the cap entirely: the second proviso disapplies the first where the compensation is received in accordance with a scheme approved by the Central Government having regard to the need for extending special protection to the workmen in the undertaking to which the scheme applies. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 10(10B), section 17(3), section 17(3)(i), section 17(3)(ii), section 10(10C) of the Income Tax Act 1961. It is reported as Income-tax Act, 1961, s.10(10B), as printed on the departmental Year 2025 and Year 2019 (No. 1) pages. Three features of this clause decide most cases. The first is the Explanation, which is doing quiet but heavy work: compensation received at the time of the CLOSING DOWN of the undertaking is deemed to be compensation received at the time of retrenchment, and so is compensation received on a TRANSFER of the ownership or management of the undertaking — but only if one of three conditions is met, namely that the service was interrupted by the transfer, or that the terms and conditions after the transfer are in any way less favourable, or that the new employer is legally not liable to pay retrenchment compensation on the footing of continuous uninterrupted service. A transfer that preserves continuity of service on identical terms therefore falls outside the clause. The second is the definitional carry-over in clause (c) of the Explanation: "employer" and "workman" bear the meanings they have in the Industrial Disputes Act 1947, so an employee who is not a "workman" within that Act — the supervisory and managerial exclusions in section 2(s) — is outside s.10(10B) altogether and must look to s.10(10C) or to s.17(3) instead. The third is the second proviso, which is the only route to a full exemption and is worth checking whenever a large closure or restructuring package is on the table; it requires an approval by the Central Government of the scheme, not merely an approval of the closure. Note finally the relationship with s.17(3)(i): compensation received at or in connection with the termination of employment is profits in lieu of salary and therefore chargeable, and s.17(3)(ii) expressly carves out payments referred to in clause (10B) of section 10 — so what s.10(10B) does not exempt remains fully taxable as salary. If it applies to you, the first step is this: Check first whether the client is a "workman" as defined in the Industrial Disputes Act 1947. Clause (c) of the Explanation imports that definition, and a supervisory or managerial employee is outside the clause however his letter describes the payment.
As printed on the Year 2025 departmental page, clause (10B) of section 10 reads: any compensation received by a workman under the Industrial Disputes Act, 1947 (14 of 1947), or under any other Act or Rules, orders or notifications issued thereunder or under any standing orders or under any award, contract of service or otherwise, at the time of his retrenchment : Provided that the amount exempt under this clause shall not exceed— (i) an amount calculated in accordance with the provisions of clause (b) of section 25F of the Industrial Disputes Act, 1947 (14 of 1947); or (ii) such amount, not being less than fifty thousand rupees, as the Central Government may, by notification in the Official Gazette, specify in this behalf, whichever is less : Provided further that the preceding proviso shall not apply in respect of any compensation received by a workman in accordance with any scheme which the Central Government may, having regard to the need for extending special protection to the workmen in the undertaking to which such scheme applies and other relevant circumstances, approve in this behalf. The Explanation provides that (a) compensation received at the time of the closing down of the undertaking is deemed to be compensation received at the time of retrenchment; (b) compensation received at the time of the transfer, whether by agreement or by operation of law, of the ownership or management of the undertaking to a new employer is deemed to be compensation received at the time of retrenchment if the service of the workman has been interrupted by the transfer, or the terms and conditions of service applicable after the transfer are in any way less favourable than those applicable immediately before it, or the new employer is legally not liable to pay retrenchment compensation on the basis that the service has been continuous and uninterrupted; and (c) the expressions "employer" and "workman" have the same meanings as in the Industrial Disputes Act, 1947. The matter was decided on 2025-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Retrenchment compensation received by a workman is exempt under s.10(10B), but only up to the lower of the amount calculated under clause (b) of section 25F of the Industrial Disputes Act 1947 and the amount specified by the Central Government by notification, which the clause requires to be not less than fifty thousand rupees. Where the compensation is received in accordance with a scheme approved by the Central Government under the second proviso, the cap does not apply at all. The Explanation extends the clause to compensation on the closing down of an undertaking, and to compensation on a transfer of ownership or management only where one of three specified conditions is satisfied, and it imports the Industrial Disputes Act meanings of "employer" and "workman".
Not applicable — this is a statement of statutory text taken from two departmental editions of section 10. No judicial reasoning is involved. In the words reproduced by the source cited on this page: "(ii) such amount, not being less than fifty thousand rupees, as the Central Government may, by notification in the Official Gazette, specify in this behalf, whichever is less :"
It was decided by the CBDT Circulars & Instructions on 2025-04-01 and is reported as Income-tax Act, 1961, s.10(10B), as printed on the departmental Year 2025 and Year 2019 (No. 1) pages. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 10(10B), section 17(3), section 17(3)(i), section 17(3)(ii), section 10(10C), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Retrenchment compensation received by a workman is exempt under s.10(10B), but only up to the lower of the amount calculated under clause (b) of section 25F of the Industrial Disputes Act 1947 and the amount specified by the Central Government by notification, which the clause requires to be not less than fifty thousand rupees. Where the compensation is received in accordance with a scheme approved by the Central Government under the second proviso, the cap does not apply at all. The Explanation extends the clause to compensation on the closing down of an undertaking, and to compensation on a transfer of ownership or management only where one of three specified conditions is satisfied, and it imports the Industrial Disputes Act meanings of "employer" and "workman". It arises in Salary & Perquisites and Capital Gains Exemptions matters, on section 10(10B), section 17(3), section 17(3)(i), section 17(3)(ii), section 10(10C) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the payment arose on a closure, rely on clause (a) of the Explanation, which deems it to be compensation received at the time of retrenchment. If it arose on a transfer of ownership or management, work through clause (b) of the Explanation and establish which of the three conditions is satisfied — interruption of service, less favourable terms, or the new employer not being liable on the basis of continuous service. If none is, the clause does not apply. Compute the cap as the lower of the section 25F(b) amount and the notified figure, and put the section 25F(b) working on the file — that is a labour-law computation and the Assessing Officer will ask for it. Before accepting the cap, ask whether the compensation was paid under a scheme approved by the Central Government under the second proviso. If it was, the cap does not apply at all and the whole amount is exempt. Get the approval on the file. Whatever is not exempt under this clause is chargeable as profits in lieu of salary under s.17(3)(i), so bring it into the computation rather than leaving it out.
Still good law. Two departmental editions six years apart (Year 2019 (No. 1) and Year 2025) print clause (10B), both provisos and the whole Explanation in identical words, which is the best evidence obtainable on this pass that the clause is unchanged. No Finance Act text was retrieved and no amendment footnote against clause (10B) could be read, so the clause's legislative history is not established here. THE NOTIFIED MONETARY LIMIT UNDER THE FIRST PROVISO WAS NOT VERIFIED AGAINST ANY NOTIFICATION; see the editor note. I did not carry out any check of judicial treatment of s.10(10B). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
A FIGURE I COULD NOT SOURCE PROPERLY, AND THE READER SHOULD TREAT IT ACCORDINGLY. The clause itself specifies no rupee amount: it empowers the Central Government to specify "such amount, not being less than fifty thousand rupees" by notification. The Income Tax Department's own current explanatory page https://www.incometaxindia.gov.in/w/taxability-of-retirement-benefits, which states on its face "This document contains the provisions of the Income-tax Act, 1961, as amended by the Finance Act, 2026", states that retrenchment compensation "is exempt from tax up to Rs. 5,00,000" and sets out a table in which Rs. 5,00,000 is one of the competing figures. I WAS NOT ABLE TO IDENTIFY OR READ THE NOTIFICATION THAT SPECIFIED Rs. 5,00,000, and I therefore do not state it in the body of this entry as a sourced figure and give no S.O. number and no commencement date for it. What I searched, so that a later pass can do better rather than repeat me: an indiankanoon phrase search on "hereby specifies five lakh rupees" combined with the word retrenchment returned no matching results, and a phrase search on "sub-clause (ii) of clause (10B) of section 10" was broken by the brackets, as the brief warns, and returned unrelated section 10B export-undertaking material. A LATER PASS SHOULD try the e-gazette, or an indiankanoon search on the words of the notification without brackets, or a judgment reproducing it. A VERIFIER PASS RAN THREE FURTHER QUERIES AND FOUND NOTHING: "specifies five lakh rupees" retrenchment compensation, "hereby specifies five lakh rupees", and "as the amount for the purposes of the said sub-clause" all returned "No matching results". A fourth, "compensation received by a workman" "five lakh rupees", returned ten results, of which the ITAT Chandigarh order in Naresh Kumar Kamboj (ITA No. 337/CHD/2024, 12 November 2024) and the ITAT Pune order in Rajendra Sitaram Chandode (ITA Nos. 259 and 260/PUN/2026, 24 March 2026) were read: NEITHER cites any notification under clause (10B), and in both the phrase "five lakh rupees" is the statutory ceiling in clause (10C), not a notified figure under clause (10B). The ITAT Chandigarh order in Suresh Pal Chauhan (ITA No. 83/Chd/2023, 20 September 2023), which this library already holds on s.10(10B), likewise cites no notification. A reader should therefore treat the Department's unsourced Rs. 5,00,000 with particular care: on the material available it cannot be distinguished from a carry-over of the clause (10C) figure, and no S.O. number, no gazette date and no commencement date for it has been established by anyone on this build. UNTIL THAT IS DONE, a practitioner should verify the current notified figure before using it in a computation; the Rs. 5,00,000 in the Department's explanatory page is stated here only as what that page says. SOURCING OF THE CLAUSE ITSELF: clause (10B) with both provisos and the whole Explanation was transcribed in full from https://incometaxindia.gov.in/w/section-10-65 (Act name "Income-tax Act, 1961", heading "Incomes not included in total income", stamp "Year: 2025") and independently, in identical words, from https://incometaxindia.gov.in/w/section-10-67 (Year: 2019 (No. 1)). Neither page carried an amendment footnote against clause (10B), so the clause has not been dated. I did not retrieve the text of section 25F of the Industrial Disputes Act 1947 or of section 2(s) of that Act this pass; what is said about them is drawn from the Income-tax Act's own cross-references and the general definition, and a reader relying on the computation should go to that Act. 'decided_on' is a LABELLED PLACEHOLDER set to the start of the tax year matching the Year 2025 departmental edition. 'bench' and 'favours' are inapplicable to a statutory entry. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Retrenchment compensation received by a workman is exempt under s.10(10B), but only up to the lower of the amount calculated under clause (b) of section 25F of the Industrial Disputes Act 1947 and the amount specified by the Central Government by notification, which the clause requires to be not less than fifty thousand rupees. Where the compensation is received in accordance with a scheme approved by the Central Government under the second proviso, the cap does not apply at all. The Explanation extends the clause to compensation on the closing down of an undertaking, and to compensation on a transfer of ownership or management only where one of three specified conditions is satisfied, and it imports the Industrial Disputes Act meanings of "employer" and "workman".
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