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Amount paid by employee on termination- taxable?

harry (Awaiting ca final results) (461 Points)

13 July 2009

consider the following situation:

Mr.A is employed with xyz ltd. under the terms of employment if Mr.A is to leave employment before a certain period, he is to pay the xyz ltd Rs. 4,00,000. suppose Mr. A terminates his contract with xyz ltd and joins ABC ltd by paying Rs. 4,00,000 to xyz ltd, can Mr. A claim exemption for this amount in the following situations:

1. Mr.A pays Rs.400000 on his own

2. ABC ltd pays Rs.400000 to Mr.A to pay to xyz ltd

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2 Replies

Abhishek Mohta (ACON) (508 Points)
Replied 14 July 2009

There is no question of exemption in the hands of Mr. A in the above case.

However if ABC Ltd. is paying then it can claim those expenses as Recruitment charges and in the hands of XYZ ltd. the smae will be miscellaneous income. It can be showed as deduction from Salaries also.

(Guest)

Hi Harry,

U/s 28 any compensationreceived on termination/modification related to management of affairs of business then it should be taxable as income from business/profession head. So as income is taxable so is any loss of similar nature will be allowed under this head but to claim this A has to be managing director or of similar designation then only it shall be allowed.

As for ABC Ltd. it can claim it u/s 37(1) as expense.