Section 10(10B): Income Tax Exemption on Retrenchment Compensation
Section 10(10B) of the Income-tax Act, 1961 provides an exemption for eligible compensation received by a workman on retrenchment. The ordinary exemption is limited to the lowest of the prescribed statutory compensation, Rs. 5,00,000 and the amount actually received, subject to a special rule for Central Government-approved schemes.
What is retrenchment compensation?
Retrenchment compensation is a payment to a workman when employment is terminated by way of retrenchment, as distinguished from an ordinary retirement benefit. It may arise under applicable labour legislation, standing orders, an award, a contract of service or another qualifying arrangement. A payment described merely as a retirement award is not automatically exempt under this section.
Legal provisions: Section 10(10B)
Section 10(10B) exempts qualifying compensation received by a workman at the time of retrenchment, subject to its statutory ceiling and provisos. Its ordinary ceiling refers to compensation calculated under section 25F(b) of the Industrial Disputes Act, 1947 and the Central Government-notified monetary amount. The Income Tax Department currently states that monetary amount as Rs. 5,00,000.
Under section 25F(b), the traditional compensation measure is 15 days' average pay for each completed year of continuous service or any part exceeding six months. The Industrial Relations Code, 2020 came into force on 21 November 2025, replacing the earlier industrial disputes framework, with transitional arrangements. The relevant labour-law provisions, date of retrenchment and any subsequent tax-law changes should be checked for the particular case.
How much compensation is exempt?
For an ordinary qualifying retrenchment payment, the exemption is the lowest of the following amounts:
| Measure | Amount |
|---|---|
| Actual retrenchment compensation received | Actual payment |
| Statutory compensation benchmark | Amount computed using the section 25F(b) formula referred to in section 10(10B) |
| Notified monetary ceiling | Rs. 5,00,000 |
Example: A workman receives Rs. 6,00,000 in retrenchment compensation, while the applicable statutory benchmark is Rs. 3,60,000. The ordinary exemption is Rs. 3,60,000, and Rs. 2,40,000 remains potentially taxable, subject to any applicable relief.
Central Government-approved compensation schemes
The second proviso to section 10(10B) provides a special treatment for compensation received under a scheme specifically approved by the Central Government to extend special protection to workmen. The ordinary ceiling in the first proviso does not apply to such a qualifying approved scheme. Approval must be established; an employer's internal severance policy is not, by itself, sufficient.
Closure and transfer of an undertaking
- Closure: Compensation received by a workman when the undertaking in which the workman is employed closes is treated as retrenchment compensation for section 10(10B).
- Transfer of ownership or management: Compensation on transfer of an undertaking may be treated as retrenchment compensation if the workman's service is interrupted, the new terms are less favourable, or the new employer does not accept the requisite liability for continuous-service compensation, as set out in the statutory explanation.
- Special protection schemes: Qualifying payments under a specifically Central Government-approved scheme are governed by the separate proviso described above.
Tax on the non-exempt amount and Section 89 relief
Any portion of retrenchment compensation that is not exempt may be taxable as salary-related income. Eligible taxpayers may examine relief under section 89(1), subject to the prescribed conditions and procedural requirements. The exemption and tax relief are separate calculations.
Documents to retain
- Retrenchment notice, termination order or closure/transfer communication.
- Employer's compensation computation and proof of payment.
- Service history, salary details and the applicable statutory calculation.
- Central Government scheme approval, if claiming the special exemption.
- Form 16, income-tax return schedules and any relief computation.
Frequently asked questions
Is all retrenchment compensation tax-free?
No. In ordinary cases, the exemption is limited to the lowest of the statutory benchmark, Rs. 5,00,000 and the amount actually received. A qualifying Central Government-approved scheme may receive different treatment.
Does Section 10(10B) cover voluntary retirement?
Voluntary retirement payments are generally considered under section 10(10C), where applicable. They should not automatically be treated as retrenchment compensation under section 10(10B).
Does compensation for closure qualify?
Yes, compensation on closure of the undertaking is expressly treated as retrenchment compensation for this provision, subject to the relevant conditions.
Official references and further reading
Read the Income-tax Act, 1961, Section 10 and the Income Tax Department's tax treatment of different income sources. For current filing guidance, visit the Income Tax e-Filing Portal. For labour-law developments, consult the Ministry of Labour and Employment.
This article explains the section 10(10B) framework and should be read with the legislation, notifications and transition rules applicable to the relevant tax year and retrenchment date. Updated 10 October 2026.