Is Compensation from Labour Court Settlements Taxable? Seeking Guidance on Conflicting Advice

Dear Seniors,

In the event when a settlement is reached in Labour Court, is the agreed amount as compensation paid to terminated workmen liable for Income Tax deduction or not? If liable or non-liable, is there any supporting judgment or guideline?

Brief on Matter

Rs. X Lac amount was decided as compensation to workmen as a settlement amount in the case of terminated workmen after inquiry and conciliation proceedings. The matter was referred to the Labour Court. By that time, both parties (employer and workmen) arrived at a settlement by signing an Affidavit on Stamp Paper.

Now, on the settlement amount of Rs. X lacs, the Income Tax (TDS) is being deducted, and the cheque was handed over before the labour court judge. However, the Labour Court judge is saying that this compensation amount is not liable for tax deduction and the full amount of the cheque should be given to the workmen.

On the other hand, our Tax department is saying that we have to deduct the Income Tax at the source and cannot issue a cheque for the full amount.

Can anyone help me out in finding the remedies to resolve this issue?

Regards,
Vipul Rana

Your tax department is correct. However, if the full and final settlement amount includes any gratuity, that should be paid without deduction of tax at source, and the remaining portion can be subjected to TDS. When making payment to the Conciliation authority, please mention it separately.

Madhu.T.K