The retrenchment compensation received by a workman is exempt provided that in general it does not exceed the sum calculated on the basis provided in Section 25F(b) of Industrial Disputes Act, 1947 or any such amount as is specified by the Central Govt. by a Notification, whichever is less. The maximum exemption is Rs. 5 lakhs where retrenchment is on or after 1-1-1997.

Dear Sir,
There are some conditions for retrenchment compensation:
The employee must be a workman.
The employee must have offered continuous service for a period of 240 days in the previous 12 months, which will be calculated as a year of continuous service.
Least of the following will be exempt from tax:

The amount of average pay provided to the employee
Rs 5,00,000
The actual amount received
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