The voluntary retirement scheme (VRS) is the most useful technique to provide overall reduction in the existing strength of the employees. It is a technique used by companies for trimming the workforce employed in the industrial unit. It is now a commonly method used to dispense off the excess manpower and thus improve the performance of the organization. It is a generous, tax-free severance payment to persuade the employees to voluntarily retire from the company. It is also known as ‘Golden Handshake’ as it is the golden route to retrenchment.
As Per Income Tax Act 1961 “Exemption-VRS (Golden Handshake Scheme)” includes: Any amount received [or receivable] by an employee of—
(i) A public sector company.
(ii) Any other company.
(iii) An authority.
(iv) A local.
(v) A co-operative society.
(vi) A University.
(vii) An Indian Institute of Technology.
(Viia) any State Government.
(Viib) the Central Government.
(Viic) an institution.
(viii) Institute of management.
Clause (10C) of section 10 of the Income-tax Act, 1961, deals with income-tax exemption on payments received at the time of voluntary retirement.
The guidelines for the purposes of section 10(10C) of the Income-tax Act have been laid down in the Income-tax Rules, 1962, by inserting a new rule 2BA therein. The guidelines provide that the scheme of voluntary retirement framed by a company should be in accordance with the following requirements, namely:—
(i) It applies to an employee of the company who has completed ten years of service or completed 40 years of age;
(ii) It applies to all employees (by whatever name called), including workers and executives of the company excepting Directors of the company;
(iii) The scheme of voluntary retirement has been drawn to result in overall reduction in the existing strength of the employees of the company;
(iv) The vacancy caused by voluntary retirement is not to be filled up, nor is the retiring employee to be employed in another company or concern belonging to the same management;
(v) The amount receivable on account of voluntary retirement of the employees does not exceed the amount equivalent to one and one-half months’ salary for each completed year of service or monthly emoluments at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. In any case, the amount should not exceed rupees five lakhs in case of each employee; and
(vi) The employee has not availed in the past the benefit of any other voluntary retirement scheme.