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Tuesday, October 01, 2013

Retrenchment Compensation

Section 2 (oo) of the Industrial Disputes Act, 1947 defines Retrenchment as - ” the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include –
a)      voluntary retirement of the workman, or
b)      retirement of the workman on reaching the age of superannuating if the contract of employment between the employer and the workman concerned contains a stipulation in that behalf; or
c)       termination of the service of the workman as a result of the non-removal of the contract of employment between the employer and the workman concerned on its expiry or of such contract being terminated under a stipulation in that behalf contained therein; or
d)      termination of the service of a workman on the ground of continued ill-health;

Section 25F in the Industrial Disputes Act, 1947
No workman employed in any industry who has been in continuous service for not less than one year under an employer shall be retrenched by that employer until--
(a) The workman has been given one month’s notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice.
(b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days' average pay 2[ for every completed year of continuous service] or any part thereof in excess of six months; and
(c) Notice in the prescribed manner is served on the appropriate Government 3[or such authority as may be specified by the appropriate Government by notification in the Official Gazette].

Procedure for calculation of retrenchment compensation
The Section 25F(b) of Industrial Disputes Act provides for payment of retrenchment compensation equivalent to 15 days average pay for every completed year of continuous service or any part thereof in excess of six months where average pay means:
a)      If workman is getting monthly salary, on the basis of last 3 calendar months
b)      If weekly wages, on the basis of last 4 completed weeks
c)       If daily wages, on the basis of last 12 full working days

The calculation of compensation is to be based from the date of appointment and in case an employee has completed 240 days, he will be entitled to 15 days retrenchment compensation besides one month’s notice or salary in lieu thereof as if he has worked for one year. 240 days includes Sundays or off days as well as festival or national holidays.
In case an employee has worked for more than one year, the procedure is that in case the subsequent period of one year is less than six months then it will be counted as one year for calculation of compensation. While making calculations the period of notice is also to be taken into consideration.
Taxability Sec 10(10B):
Any compensation received by a person due to the Retrenchment shall be exempted up to minimum of the following:
a)      An amount calculated in accordance with the provisions of Section 25F (b) of the Industrial Disputes Act, 1947
b)      Rs. 5,00,000
c)       The actual amount received
In simple terms all the amounts up to Rs 5 Laces received as Retrenchment Compensation is fully exempt from Income Tax of India. Compensations in excess of the above mentioned limits are taxable as salary or profit in lieu of salary which is however eligible for relief under Section 89(1) read along with Indian Income Tax Rule 21A.