Do that you must pay tax on severance fee after job loss?

Layoffs in startups and tech firms are making headlines on a regular basis. Most firms handing out pink slips are additionally giving 2-3 months of severance pay to affected staff. Tax legal guidelines in India enable tax exemption on such compensation underneath sure circumstances, however the scope is proscribed.

As per part 17(3) of the Income Tax Act, any fee acquired by a taxpayer as a result of termination of her employment is taken into account as income in lieu of wage. Such income entice tax in the identical method as wage is taxed. This implies that the employer might even deduct TDS on the severance pay.

When is exemption allowed?

One means in which you will get tax reduction on the severance package deal is when it’s paid underneath voluntary retirement scheme (VRS), in accordance with Section 10(10C) of the Income Tax Act. The part permits one-time exemption to staff on the proceeds acquired on voluntary retirement or separation.

The time period voluntary separation shouldn’t be outlined by the IT Act however might be understood from the 2 circumstances relevant to qualify for exemption underneath Section 10(10C). “This part applies to an worker who has accomplished 10 years of service or accomplished 40 years of age. So, an individual nearer to retirement (above 40 years of age) might declare this exemption regardless of the variety of years served with the employer, which can be understood as voluntary retirement. But it is usually relevant to an individual (under 40 years of age) who has accomplished 10 years of service, which can be understood as voluntary separation,” said Neeraj Agarwala , Partner, Nangia Andersen India.

Exemption allowed under section 10(10C) is lesser of the amount received or ₹5 lakh.

Note that the ‘voluntary retirement’ phrase does not mean that you can’t take up employment again. “It only provides that the retiring employee shall not be employed in another company or concern belonging to the same management as the previous employer,” stated Agarwala.

So, can an worker who’s being laid off ask the employer to pay compensation underneath VRS in order to get tax exemption? The reply isn’t any. “VRS scheme is drafted by the employer and exemption underneath part 10(10C) is simply relevant if prescribed circumstances are fulfilled. One of those circumstances is that the scheme must be for all staff. All severance pay shouldn’t be VRS, and the choice is with the employer,” stated Agarwala.

Section 89 too provides tax reduction when as a result of lumpsum severance payout, the overall revenue is assessed at a price larger than that it will in any other case have been assessed. “The reduction might be granted primarily based on the typical tax price of the earlier three years and range relying on the compensation acquired,” explained Agarwala. “The condition is that compensation is paid after continuous service of not less than three years and the unexpired portion of his term of employment is also not less than three years.” To declare this profit, the worker ought to submit a declaration in Form 10E to the employer. However, tax breaks underneath part 10(10C) and Section 89 are mutually unique and can’t each be claimed.

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