Income Tax

Retrenchment Compensation and Severance Pay: How Much Is Tax-Exempt Under Section 10(10B)?

CA Nikhil Gupta·June 2026·6 min readIncome Tax

Reviewed by CA Nikhil Gupta · Last reviewed 17 June 2026

Losing a job is stressful enough without having to figure out whether the compensation you receive on the way out is taxable. Retrenchment compensation gets a specific, limited exemption under the Income Tax Act, but the amount you actually keep tax-free depends on a formula most people have never heard of.

What Counts as Retrenchment Compensation

Retrenchment, in the context this exemption applies to, generally refers to the termination of an employee's service by the employer for reasons not amounting to disciplinary action, typically due to surplus staff, closure of a unit, restructuring, or similar business reasons, as understood under industrial and labour law. Compensation paid to a workman on such retrenchment is what Section 10(10B) addresses. It is distinct from a Voluntary Retirement Scheme (VRS), which has its own separate exemption under Section 10(10C), and from ordinary resignation, which carries no such exemption.

Related Calculator

Retrenchment Compensation and Notice Pay Calculator

Open Calculator →

The Section 10(10B) Exemption Formula

How much is exempt: The exemption under Section 10(10B) is available for the lower of: (a) the amount of compensation actually received, (b) the amount calculated in accordance with the provisions of Section 25F(b) of the Industrial Disputes Act, 1947 (broadly, 15 days' average pay for every completed year of continuous service, or part thereof in excess of six months), or (c) a specified monetary limit notified by the Central Government from time to time. Whichever of these three figures is the lowest becomes the exempt amount; any compensation received in excess of this lowest figure is taxable as salary income (typically under the head 'profits in lieu of salary').

Who Is Covered: The 'Workman' Definition

The exemption under Section 10(10B) is tied to the definition of 'workman' under the Industrial Disputes Act, which has historically been understood to cover employees engaged in manual, unskilled, skilled, technical, operational, clerical or supervisory work, generally up to a certain wage/salary threshold, and excludes those primarily in managerial or administrative roles above that threshold. This means senior managers or executives who are retrenched may not automatically qualify for this specific exemption in the same way, though their severance payments would still be examined under general 'profits in lieu of salary' provisions for any other applicable relief.

Worked Example

Retrenchment Compensation vs VRS vs Gratuity vs Notice Pay

Payment Type	Relevant Exemption
Retrenchment compensation (involuntary termination, workman)	Section 10(10B), formula-based exemption as above
Voluntary Retirement Scheme (VRS) payout	Section 10(10C), exempt up to Rs 5 lakh (subject to conditions and scheme guidelines)
Gratuity on termination/retirement	Section 10(10), exempt up to prescribed limits based on years of service
Pay in lieu of notice period	No specific exemption; generally fully taxable as salary/profits in lieu of salary

Section 89 Relief for Lump-Sum Compensation

The taxable portion of retrenchment compensation, being a lump-sum amount relating to past years of service received in a single year, can push the recipient into a higher tax bracket for that year. Section 89 relief, computed via Form 10E, allows spreading this lump sum across the relevant years for tax computation purposes, reducing the overall tax impact, similar to how it applies to salary arrears.

📋

Received retrenchment or severance compensation?Check how much is exempt and whether Section 89 relief can reduce your tax on the balance.

Check Your Tax

Frequently Asked Questions

Is severance pay received under a private company's standard exit policy (not due to a formal retrenchment) eligible for Section 10(10B)? ▼

Section 10(10B) is specifically linked to 'retrenchment' as understood under the Industrial Disputes Act, generally involving termination for reasons like redundancy or closure, and to employees falling within the 'workman' definition. A general severance or exit payment under a company's HR policy, for an employee who does not fall within the workman definition or where the termination does not meet the retrenchment criteria, would generally not qualify for this specific exemption and would be taxable as profits in lieu of salary, though Section 89 relief may still be relevant for the lump-sum nature of the payment.

Does retrenchment compensation received from a foreign employer for an India-based job also qualify for this exemption? ▼

The Section 10(10B) exemption applies based on the nature of the compensation and the employee's status (workman under Indian industrial law) rather than the nationality of the employer per se. If the employment was governed by Indian labour law and the employee qualifies as a workman, compensation on retrenchment could potentially be examined under this provision, but the specific facts, including which country's labour laws governed the employment relationship, would need to be assessed.

If I receive both retrenchment compensation and gratuity on the same termination, are both exemptions available together? ▼

Yes, these are separate provisions addressing different components of the termination payout. Retrenchment compensation is examined under Section 10(10B) using its specific formula, while gratuity (a separate payment based on years of service, typically under the Payment of Gratuity Act or company scheme) is examined separately under Section 10(10) with its own exemption limits. Both exemptions can apply independently to their respective components of the total termination payout, subject to each provision's own conditions and limits.

Source and review trail

Use the current official instrument, portal or regulator publication before acting. This panel separates the category authority from page-specific references.

Primary category: Income Tax
Official starting point: www.incometax.gov.in

Page source links

The prior page did not embed a page-specific external source. The category authority above is the minimum verification starting point; a specific instrument should be added when available.

Primary sources & related provisions

Statutory provisions referenced in this guide:

Section 10 - Income-tax Act