In Simple words Severance pay means:
“A severance package is pay and benefits employees may be entitled to receive when they leave employment at a company unwillfully”
Thus, as and when a company used to introduce a policy to lay off employees it used to pay severance pay to the employees to reduce its running cost and employee used to be confused on how to show this amount in his Income tax return as it was not a part of salary, nor it was covered under income from other sources.
In various cases, assessee used to argue that its a one time transaction with the company for maintaining his living as he wont be able to get any new employment very soon and thus they used to treat it as capital receipt and wont pay tax on same.
However in various cases it came to notice that many people used to immediately get another job and still didn’t offer such amount to tax and treat it as capital receipt. Same treatment was done in case of a business where an agreement was entered into between parties to stop one from doing business and paying a lump sum amount for same.
Now to tackle both a situation amendment was introduced by Finance Bill, 2018 w.e.f. 01.04.2019 in section 28 and section 56, wherein u/s 28(ii) the following clause was added:
“any person, by whatever name called, at or in connection with the termination or the modification of the terms and conditions, of any contract relating to his business;”
To tackle severance pay received by salaried employee a new clause as section 56(2)(xi) was introduced wherein it was mentioned that:
“any compensation or other payment, due to or received by any person, by whatever name called, in connection with the termination of his employment or the modification of the terms and conditions relating thereto.”
Thus after the above amendment any amount received for termination of any contract was brought under tax net and was no more a capital receipt.
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