A Look at Severance Pay and Tax Exemption

For an employee who has received the pink slip, it is possible to claim tax exemptions or relief under the Income-tax Act (ITA), 1961, subject to certain conditions. 

A compensation or severance pay received under the Industrial Disputes Act, 1947 after retrenchment can be claimed as an exemption under Section 10(10B) of the ITA, 1961. The condition, however, is that the particular employee had not been working in a managerial or administrative, or supervisory position with wages exceeding Rs 10,000, in such a case they can avail of an exemption of up to Rs 5 lakh as provided under Section 10(10B) of the ITA, 1961.

As per the Voluntary Retirement Scheme (VRS), exemption under Section 10 (10C) of the ITA, 1961 can be claimed. The condition is that the maximum compensation should be within Rs 5 lakh, the individual is an employee of an authority established under the Central or State laws, Public Sector Undertakings (PSUs), and University, among others and the receipts should comply with the Rule 2BA of the Income-tax Rule, 1962. The exemption is allowed to be claimed in the assessment year in which the compensation is received, though.

Furthermore, an individual is eligible to claim relief under Section 89 of the ITA, 1961 for compensation received with the termination of employment as salary paid in arrears or in advance. This is provided the individual has provided continuous service for about three years and the unexpired portion of the term of employment is three years or more.