Do We Need To Deduct Income Tax, PF And ESI On Closure Compensation?

Respected Seniors,

I need advice from all of you. Please let me know whether statutory deductions like Income Tax, PF, and ESI are applicable to Closure Compensation. Do we need to deduct Income Tax, PF, and ESI on the amount payable to workmen?

Awaiting your learned response.

No need to recover ESI and EPF from closure compensation or voluntary retirement compensation. However, Income Tax is applicable if the amount exceeds Rs. 10 lakh.

Thank you, sir, for your advice. But one small clarification: I contacted PF authorities, and they said that this is a Retention Allowance, and PF will be applicable to the extent of Rs. 15,000/-. Can you please clear this confusion.

Amit Sarkar

This is the big story going on with PF. You need to cover all allowances except HRA to calculate for Basic. Hence, you need to pay PF for (Gross - HRA) salary. If <15000/-, if >15000, you can restrict your PF contribution to 15000 salary only.

Closure compensation is different from retention allowance. Closure compensation refers to retrenchment compensation, which is paid when the employment is terminated due to the closure of the organization. This will not attract PF because it is not earned by working or remaining in the service of the organization.

On the other hand, retaining allowance is an amount paid to some specially talented people during a temporary closure of the organization just to retain their service with the company. This is an amount paid monthly even though there is no work but is paid to retain them with the company, failing which they may go, and the company may not get their service when it starts production. This amount is like salary paid and therefore will attract PF.

In your case, it is not retaining allowance because it is a one-time payment and it is paid to sever the employee-employer relationship. Therefore, there is no question of paying a contribution on this amount.

Madhu.T.K

When you are closing down and paying compensation, how can it be called a Retention Allowance? RA is paid to retain people during temporary closure, and the recipient worker is obliged to report for work when called by the employer.

Dear Sarkaramit,

Subject to fulfilling certain conditions, if this is a retrenchment under the ID Act due to the closure of the establishment, you can avail an exemption on both gratuity and retrenchment compensation to the extent provided under section 10(10B) of the IT Act. If you indicate the exact conditions of your separation, I can examine further.