If you receive any amount from your employer due to termination of employment, its taxability depends on the nature of the payment. Here’s how it is treated under the Income Tax Act, 1961:

1. Compensation for Voluntary Retirement (VRS) or Retrenchment

• Exempt up to ₹5,00,000 under Section 10(10C) if received under a government-approved Voluntary Retirement Scheme (VRS).
• Any amount exceeding ₹5,00,000 is taxable under “Income from Salary.”

2. Gratuity

• If received as part of termination benefits:
  • Government employees: Fully exempt under Section 10(10)(i).
  • Private sector employees: Exempt up to the least of the following (Section 10(10)(ii)/(iii)):
    1. ₹20,00,000
    2. Last drawn salary × 15 days × Number of years of service
    3. Actual gratuity received
  • Any amount beyond the exemption limit is taxable under Salary Income.

3. Leave Encashment

• Government employees: Fully exempt under Section 10(10AA)(i).
• Private employees: Exempt up to the least of the following (Section 10(10AA)(ii)):
  1. ₹25,00,000
  2. Last drawn salary × 10 months
  3. Actual leave encashment received
• Excess amount is taxable as Salary Income.

4. Retrenchment Compensation

• Exempt up to the least of the following under Section 10(10B):
  1. ₹5,00,000
  2. 15 days’ average salary for each completed year of service
  3. Actual retrenchment compensation received
• Any amount beyond this limit is taxable as Salary Income.

5. Severance Pay or Ex-Gratia Compensation

• Any severance or compensation not covered under the above provisions is fully taxable as Salary Income.

6. Notice Pay & Bonus

• Any salary in lieu of notice period or bonus received is fully taxable under Income from Salary.

Conclusion

While certain termination benefits enjoy tax exemptions, others are fully taxable. To minimize tax liability, one can explore deductions under Section 89 (Relief for Salary Arrears & Compensation) or invest in tax-saving instruments.

Yes, interest received on compensation or enhanced compensation is taxable under the Income Tax Act, 1961. The tax treatment depends on the nature of the compensation and the provisions applicable.

1. Interest on Compensation for Land Acquisition (Section 56(2)(viii))

• If interest is received on compensation or enhanced compensation awarded for compulsory land acquisition, it is taxed under “Income from Other Sources.”
• Tax Rate: It is taxable at slab rates applicable to the recipient.
• Exemption (Section 10(37)): If the land acquired was agricultural land in a rural area, the compensation itself is exempt from tax, but the interest remains taxable.

2. Interest on Compensation in Other Cases

• If compensation is awarded in cases other than land acquisition (e.g., motor accident claims, delayed payments, consumer disputes, etc.), the interest component is taxable as Income from Other Sources.
• Example: Interest on delayed payment of salary, compensation from court cases, etc., is also taxable.

3. Taxability in the Year of Receipt

• As per Section 145B, interest on compensation or enhanced compensation is taxed in the year it is received, irrespective of the year in which it was accrued.
• However, 50% deduction is allowed under Section 57(iv), meaning only 50% of the interest amount is taxable.

Conclusion

Interest on compensation, whether from land acquisition or other legal claims, is taxable under “Income from Other Sources.” However, if it is related to land acquisition, only 50% of the interest is taxable after deduction under Section 57(iv). The compensation itself (excluding interest) may be exempt depending on the nature of the asset involved.

Interest on securities refers to the interest income received from government securities, debentures, bonds, or other debt instruments. This income is taxable under two different heads, depending on the nature of the assessee’s activities.

Relevant Legal Provisions:

🔹 Section 56(2)(id) – Income from Other Sources:

“Income by way of interest on securities, if not chargeable under the head ‘Profits and gains of business or profession’, shall be chargeable to income-tax under the head ‘Income from other sources’.”

🔹 Section 145 – Method of accounting:

Income under the head “Profits and gains of business or profession” or “Income from other sources” shall be computed in accordance with the method of accounting regularly employed by the assessee.

Computation of Taxable Interest on Securities:

A. If Assessee is NOT in the business of trading in securities (e.g., salaried person, HUF):

• Tax head: Income from Other Sources

• Taxable on: Due basis or receipt basis (as per accounting method adopted)

• Taxable Amount: Gross interest received or accrued on securities (whether taxable or exempt)

✅ Deductions allowed:

• Collection charges

• Commission or remuneration to banker/agent for realizing interest

• Any interest on loan taken to purchase securities (as per Section 57)

B. If Assessee is in the Business of Trading in Securities:

• Tax head: Profits and Gains from Business or Profession

• Entire interest is added to business income

• All expenses related to the business (purchase, brokerage, loan interest, etc.) are allowed.

Types of Securities & Taxability: