Tax on VRS (Voluntary Retirement Scheme) Compensation

Voluntary retirement scheme is a method used by companies to reduce surplus staff. This mode has come about in India as labour laws do not permit direct retrenchment of unionized employees.
As per Section 10(10C) of Income Tax Act,1961,any compensation received upon voluntary retirement or separation is exempt from tax when the following conditions are fulfilled Compensation received is towards voluntary retirement or separation.

  1. Maximum compensation received is Rs 5,00,000.
  2. Exemption when allowed for a assessment year, will not be allowed for any other assessment year.
  3. The recipient is an employee of an authority established under the central or state act, local authority, university, IIT, state government or central government, notified institute of management, or a notified institute with importance throughout India or any state, PSU, company or cooperative society.
  4. The receipts are in compliance with Rule 2BA
  5. Where relief under section 89 has been taken by an employee for compensation for voluntary retirement or separation or termination of services – no exemption shall be available under this section for the same assessment year or any other assessment year.

Rule 2BA – the scheme of voluntary retirement must fulfill these conditions-

  1. The recipient must have completed 10 years of service or 40 years of age (not applicable to employees of a PSU) – therefore a less than 40 years old employee of a company which is less than 10 years old will not able to satisfy this condition and therefore no exemption will be available to such an employee.
  2. The scheme is applied to all employees, including workers & executives of a concern excluding directors of a company or a co-operative society.
  3. The scheme shall result in overall reduction of the existing strength of the employees of the company.
  4. The vacancy caused by voluntary retirement or separation is not filled up, and the retiring employee must not be employed in another company or concern belonging to the same management.
  5. The amount receivable does not exceed 3 month’s salary for each completed year of service OR monthly emoluments at the time of retirement multiplied by balance months of service left before the date of his retirement.
  • No other exemption/ rebate/ deduction can be taken availed if exemption u/S. 10(10C) is availed in respect of the amount of VRS Compensation. Proviso 3 to S. 10(10C) is inserted by Finance (No.2) Act, 2009 w.e.f 01-04-2010 stating that exemption U/s 10(10C) cannot be availed if Rebate U/s 89 is already availed.
  • Also similar proviso is inserted under Section 89 stating that if exemption u/S 10(10C) is availed already then rebate U/S 89 cannot be availed. So it’s a welcome change for  revenue department.

 

  • Relevant case Laws-
  1. S.C. Babu Vs. CMD, Syndicate Bank, [2002] 253 ITR 1 (AP)
  2. State Bank of Travavcore Vs. Central Board of Direct Taxes [2006]151 taxman 133 (Ker.)

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