Hi all, Good afternoon, I am working in 3P of HUL based in Gujarat as Officer-HR - due to some reason, the company may shut down permanently.
Please give me a suggestion for the retrenchment compensation calculation and also suggest the difference between retrenchment and gratuity.
From India, Ahmedabad
Please give me a suggestion for the retrenchment compensation calculation and also suggest the difference between retrenchment and gratuity.
From India, Ahmedabad
Hi Chetan T,
I presume yours is covered under the Factories act and if so ID act would apply. There may be requirement of approval of competent authorities of the state govt. We have discussed closure & retrenchment in these forums which you can consult for your guidance, formalities and computation of retrenchment compensation.
ID ACT:
2[25F. Conditions precedent to retrenchment of workmen. —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;
3[***]
(b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days' average pay 4[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 5[or such authority as may be specified by the appropriate Government by notification in the Official Gazette]].
25-O. Procedure for closing down an undertaking.
25-O. Procedure for closing down an undertaking
(1) An employer who intends to close down an undertaking of an industrial establishment to which this Chapter applies shall, in the prescribed manner, apply, for prior permission at least ninety days before the date on which the intended closure is to become effective, to the appropriate government, stating clearly the reasons for the intended closure of the undertaking and a copy of such application shall also be served simultaneously on the representatives of the workmen in the prescribed manner:
PROVIDED that nothing in this sub-section shall apply to an undertaking set up for the construction of buildings, bridges, roads, canals, dams or for other construction work.
(2) Where an application for permission has been made under sub-section(l),the appropriate government, after making such enquiry as it thinks fit and after giving a reasonable opportunity of being heard to the employer, the workmen and the persons interested in such closure may, having regards to the, genuineness and adequacy of the reasons stated by the employer, the interests of the general public and all other relevant factors, by order. and for reasons to be recorded in writing, grant or refuse to grant such permission and a copy of such order shall be communicated to the employer and the workmen.
(3) Where an application has been made under sub-section (1) and the appropriate government does not communicate the order granting or refusing to grant permission to the employer within a period of sixty days from the date on which such application is made, the permission applied for shall be deemed to have been granted on the expiration of the said period of sixty days.
(4) An order of the appropriate government granting or refusing to grant permission shall, subject to the provisions of sub-section (5), be final and binding on all the parties and shall remain in force for one year from the date of such order.
(5) The appropriate government may, either on its own motion or on the application made by the employer or any workman, review its order granting or refusing to grant permission under sub-section (2) or refer the matter to a Tribunal for adjudication:
PROVIDED that where a reference has been made to a Tribunal under this sub-section , it shall pass an award within a period of thirty days from the date of such reference.
(6) Where no application for permission under sub-section (l) is made within the period specified therein, or where the permission for closure has been refused, the closure of the undertaking shall be deemed to be illegal from the date of closure and the workmen shall be entitled to all the benefits under any law for the time being in force as if the undertaking had not been closed down.
(7) Notwithstanding anything contained in the foregoing provisions of this section, the appropriate government may, if it is satisfied that owing to such exceptional circumstances as accident in the undertaking or death of the employer or the like it is necessary so to do, by order, direct that the provisions of sub-section (1) shall not apply in relation to such undertaking for such period as may be specified in the order.
(8) Where an undertaking is permitted to be closed down under sub-section (2) or where permission for closure is deemed to be granted under sub-section (3), every workman who is employed in that undertaking immediately before the date of application for permission under this section, shall be entitled to receive compensation which shall be equivalent to fifteen days’ average pay for every completed year of continuous service or any part thereof in excess of six months.]
25R. Penalty for closure:
(1) Any employer who closes down an undertaking without complying with the provisions of sub-section (1) of section 25-O shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to five thousand rupees, or with both.
(2) Any employer, who contravenes 102[an order refusing to grant permission to close down an undertaking under sub-section (2) of section 25-O or a direction given under section 25P], shall be punishable with imprisonment for a term which may extend to one year, or with fine which may extend to five thousand rupees, or with both, and where the contravention is a continuing one, with a further fine which may extend to two thousand rupees for every day during which the contravention continues after the conviction.
Also Pl.go through these links -
https://www.citehr.com/224715-retren...ml#post1012676
https://www.citehr.com/342152-retren...ml#post1575805
From India, Bangalore
1064I presume yours is covered under the Factories act and if so ID act would apply. There may be requirement of approval of competent authorities of the state govt. We have discussed closure & retrenchment in these forums which you can consult for your guidance, formalities and computation of retrenchment compensation.
ID ACT:
2[25F. Conditions precedent to retrenchment of workmen. —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;
3[***]
(b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days' average pay 4[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 5[or such authority as may be specified by the appropriate Government by notification in the Official Gazette]].
25-O. Procedure for closing down an undertaking.
25-O. Procedure for closing down an undertaking
(1) An employer who intends to close down an undertaking of an industrial establishment to which this Chapter applies shall, in the prescribed manner, apply, for prior permission at least ninety days before the date on which the intended closure is to become effective, to the appropriate government, stating clearly the reasons for the intended closure of the undertaking and a copy of such application shall also be served simultaneously on the representatives of the workmen in the prescribed manner:
PROVIDED that nothing in this sub-section shall apply to an undertaking set up for the construction of buildings, bridges, roads, canals, dams or for other construction work.
(2) Where an application for permission has been made under sub-section(l),the appropriate government, after making such enquiry as it thinks fit and after giving a reasonable opportunity of being heard to the employer, the workmen and the persons interested in such closure may, having regards to the, genuineness and adequacy of the reasons stated by the employer, the interests of the general public and all other relevant factors, by order. and for reasons to be recorded in writing, grant or refuse to grant such permission and a copy of such order shall be communicated to the employer and the workmen.
(3) Where an application has been made under sub-section (1) and the appropriate government does not communicate the order granting or refusing to grant permission to the employer within a period of sixty days from the date on which such application is made, the permission applied for shall be deemed to have been granted on the expiration of the said period of sixty days.
(4) An order of the appropriate government granting or refusing to grant permission shall, subject to the provisions of sub-section (5), be final and binding on all the parties and shall remain in force for one year from the date of such order.
(5) The appropriate government may, either on its own motion or on the application made by the employer or any workman, review its order granting or refusing to grant permission under sub-section (2) or refer the matter to a Tribunal for adjudication:
PROVIDED that where a reference has been made to a Tribunal under this sub-section , it shall pass an award within a period of thirty days from the date of such reference.
(6) Where no application for permission under sub-section (l) is made within the period specified therein, or where the permission for closure has been refused, the closure of the undertaking shall be deemed to be illegal from the date of closure and the workmen shall be entitled to all the benefits under any law for the time being in force as if the undertaking had not been closed down.
(7) Notwithstanding anything contained in the foregoing provisions of this section, the appropriate government may, if it is satisfied that owing to such exceptional circumstances as accident in the undertaking or death of the employer or the like it is necessary so to do, by order, direct that the provisions of sub-section (1) shall not apply in relation to such undertaking for such period as may be specified in the order.
(8) Where an undertaking is permitted to be closed down under sub-section (2) or where permission for closure is deemed to be granted under sub-section (3), every workman who is employed in that undertaking immediately before the date of application for permission under this section, shall be entitled to receive compensation which shall be equivalent to fifteen days’ average pay for every completed year of continuous service or any part thereof in excess of six months.]
25R. Penalty for closure:
(1) Any employer who closes down an undertaking without complying with the provisions of sub-section (1) of section 25-O shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to five thousand rupees, or with both.
(2) Any employer, who contravenes 102[an order refusing to grant permission to close down an undertaking under sub-section (2) of section 25-O or a direction given under section 25P], shall be punishable with imprisonment for a term which may extend to one year, or with fine which may extend to five thousand rupees, or with both, and where the contravention is a continuing one, with a further fine which may extend to two thousand rupees for every day during which the contravention continues after the conviction.
Also Pl.go through these links -
https://www.citehr.com/224715-retren...ml#post1012676
https://www.citehr.com/342152-retren...ml#post1575805
From India, Bangalore
Hi
Loginmiraclelogistics
Can you please share below points
1) Is retrenchment benfits are based on basic salary or overall salary?
2) if employer is planning to shut operations by Mid of Feb then in that case , Income tax deducted on retrenchment and leve encashment will huge, So is there any way out beneficial to both parties?
Thanks In advance
From India, Delhi
Loginmiraclelogistics
Can you please share below points
1) Is retrenchment benfits are based on basic salary or overall salary?
2) if employer is planning to shut operations by Mid of Feb then in that case , Income tax deducted on retrenchment and leve encashment will huge, So is there any way out beneficial to both parties?
Thanks In advance
From India, Delhi
Dear Chetan & Aditya,
In view of the elaborate answer by Mr.Kumar on the procedural formalities on retrenchment, let me be straight to your queries.
1) The quintessence of the definition of the term "retrenchment" u/s 2(oo) of the IDA, 1947 is the UNILATERAL TERMINATION of the employee BY THE EMPLOYER FOR WHATEVER REASON other than the formal dismissal on the ground of any misconduct, non-renewal of the contract of employment as per the pre-mentioned stipulation in the contract and on the ground of continued ill-health of the employee OR resignation/voluntary retirement respectively.
Gratuity, on the contrary, is a terminal benefit necessitated by UNILATERAL TERMINATION either by the employer or employee after rendering the minimum qualifying service by way of discharge, retrenchment or dismissal other than the ground of riotous behavior or moral turpitude or by AUTOMATIC TERMINATION of the contract of employment due to the death or disablement due to accident or disease of the employee while in service notwithstanding the completion of the minimum qualifying service OR attaining the predetermined age of superannuation by the employee
The minimum qualifying service for retrenchment is completion of 240 days of continuous service in the preceding 12 months period.
2) Retrenchment and gratuity also differ in terms of method of calculation of the sum to be paid.
Retrenchment Compensation is calculated on the basis of "average pay" as defined u/s 2(aaa) of the IDA, 1947 which simply means the gross pay minus specific allowances given to defray special expenses peculiar to the nature of job.
Gratuity, on the other hand, is based only on the sum of basic and D.A last drawn.
3) Aditya, retrenchment compensation upto Rs. 5 lakh is exempt u/s 10(10B) of the IT Act, if I remember correct.
From India, Salem
In view of the elaborate answer by Mr.Kumar on the procedural formalities on retrenchment, let me be straight to your queries.
1) The quintessence of the definition of the term "retrenchment" u/s 2(oo) of the IDA, 1947 is the UNILATERAL TERMINATION of the employee BY THE EMPLOYER FOR WHATEVER REASON other than the formal dismissal on the ground of any misconduct, non-renewal of the contract of employment as per the pre-mentioned stipulation in the contract and on the ground of continued ill-health of the employee OR resignation/voluntary retirement respectively.
Gratuity, on the contrary, is a terminal benefit necessitated by UNILATERAL TERMINATION either by the employer or employee after rendering the minimum qualifying service by way of discharge, retrenchment or dismissal other than the ground of riotous behavior or moral turpitude or by AUTOMATIC TERMINATION of the contract of employment due to the death or disablement due to accident or disease of the employee while in service notwithstanding the completion of the minimum qualifying service OR attaining the predetermined age of superannuation by the employee
The minimum qualifying service for retrenchment is completion of 240 days of continuous service in the preceding 12 months period.
2) Retrenchment and gratuity also differ in terms of method of calculation of the sum to be paid.
Retrenchment Compensation is calculated on the basis of "average pay" as defined u/s 2(aaa) of the IDA, 1947 which simply means the gross pay minus specific allowances given to defray special expenses peculiar to the nature of job.
Gratuity, on the other hand, is based only on the sum of basic and D.A last drawn.
3) Aditya, retrenchment compensation upto Rs. 5 lakh is exempt u/s 10(10B) of the IT Act, if I remember correct.
From India, Salem
Thanks Mr.Umakanthan sir making my rejoinder simpler.
I may add. There are two issues one is the compensation calculation and the other is IT on the sums employees paid consequent to retrenchment.
1. Under retrenchment compensation, what is minimal is 15 days salary for every year of service rendered. During the recent past (Post liberalisation) GoI introduced a concept of STPI (Special Terminal Package) and VSS (Voluntary Separation of Services). Of course these two schemes were in govt. & quasi govt. entities which may not apply suo motto for every entity but willing entities can adopt more beneficial schemes so that employees can make the implementation smooth as the employees can receive till more. In short these schemes are specially coined to enable employees to enjoy additional benefits such as Special package though it's one way a retrenchment scheme but voluntary as optees are entitled to 'retrenchment' associated issues as they are not going to be treated as voluntarily retired. Entities are permitted to addon over and above the statutorily entitled benefits. Such as no cap on leave encashment, retention of co.qrs at normal rent for extended terms, eligibility to engage on different terms and above all IT benefits extraordinary under a special section, compensation computed on past service vs future salary whichever beneficial. I'll cite with an example in my next posting.
2. W.r.t. IT - CHAPTER III-INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME-
Incomes not included in total income.
Compensation, gratuity, leave encashment etc received under this special package will benefit the recipients by way of higher exemption limits, almost fully tax free in the year of receipt in addition to the benefits/methods of computation under sec.89(1) of IT which would enable avail the option spreading/distribution of incomes received in the year of receipt over the past years by which the net IT liability expected to give better reliefs when distributed over many past years rather than accounting in the year of receipt, whichever beneficial. There is a prescribed form 10E for this purpose. Let me take little more time in explaining this option in my next post.
From India, Bangalore
I may add. There are two issues one is the compensation calculation and the other is IT on the sums employees paid consequent to retrenchment.
1. Under retrenchment compensation, what is minimal is 15 days salary for every year of service rendered. During the recent past (Post liberalisation) GoI introduced a concept of STPI (Special Terminal Package) and VSS (Voluntary Separation of Services). Of course these two schemes were in govt. & quasi govt. entities which may not apply suo motto for every entity but willing entities can adopt more beneficial schemes so that employees can make the implementation smooth as the employees can receive till more. In short these schemes are specially coined to enable employees to enjoy additional benefits such as Special package though it's one way a retrenchment scheme but voluntary as optees are entitled to 'retrenchment' associated issues as they are not going to be treated as voluntarily retired. Entities are permitted to addon over and above the statutorily entitled benefits. Such as no cap on leave encashment, retention of co.qrs at normal rent for extended terms, eligibility to engage on different terms and above all IT benefits extraordinary under a special section, compensation computed on past service vs future salary whichever beneficial. I'll cite with an example in my next posting.
2. W.r.t. IT - CHAPTER III-INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME-
Incomes not included in total income.
Compensation, gratuity, leave encashment etc received under this special package will benefit the recipients by way of higher exemption limits, almost fully tax free in the year of receipt in addition to the benefits/methods of computation under sec.89(1) of IT which would enable avail the option spreading/distribution of incomes received in the year of receipt over the past years by which the net IT liability expected to give better reliefs when distributed over many past years rather than accounting in the year of receipt, whichever beneficial. There is a prescribed form 10E for this purpose. Let me take little more time in explaining this option in my next post.
From India, Bangalore
Dear friends,
Pl.note Corrections in my yesterday's posting-
Pl.read STBP (Special Terminal Benefit Package) instead of STPI. And Voluntary Separation Scheme (VSS). This is to be read with exemptions at higher under sec.10BB of the IT Act.
Re: Section 89(1) – Relief of Salary. Tax is calculated on the taxpayer's total income earned or received/payable during the financial year. If the assessee has received any portion of salary 'in arrears or in advance' (the retrenchment package), or received a family pension in arrears, under the Income Tax Act it is allowed to be claimed as tax relief under section 89(1) of the IT Act.
How does one to get relief under section 89 1?
Here are the steps to calculate relief under section 89(1) of Income Tax Act, 1961:
-Calculate tax payable on total income including arrears in the year in which it is received.
-Calculate tax payable on total income excluding arrears in the year in which it is received.
-Calculate difference between (1) and (2).
For detailed illustration please read the attachment.
For any assistance one has to seek the help of a CA who can do the rest. This is an exercise worth the trouble taken as persons involved likely to be benefited by way of 'tax planning'
From India, Bangalore
Pl.note Corrections in my yesterday's posting-
Pl.read STBP (Special Terminal Benefit Package) instead of STPI. And Voluntary Separation Scheme (VSS). This is to be read with exemptions at higher under sec.10BB of the IT Act.
Re: Section 89(1) – Relief of Salary. Tax is calculated on the taxpayer's total income earned or received/payable during the financial year. If the assessee has received any portion of salary 'in arrears or in advance' (the retrenchment package), or received a family pension in arrears, under the Income Tax Act it is allowed to be claimed as tax relief under section 89(1) of the IT Act.
How does one to get relief under section 89 1?
Here are the steps to calculate relief under section 89(1) of Income Tax Act, 1961:
-Calculate tax payable on total income including arrears in the year in which it is received.
-Calculate tax payable on total income excluding arrears in the year in which it is received.
-Calculate difference between (1) and (2).
For detailed illustration please read the attachment.
For any assistance one has to seek the help of a CA who can do the rest. This is an exercise worth the trouble taken as persons involved likely to be benefited by way of 'tax planning'
From India, Bangalore
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