Income tax liability on amount received at the time of Voluntary Retirement. VRS compensation received by an employee at the time of his voluntary retirement in accordance with prescribed guidelines is exempt up to Rs 5 lakhs. Different schemes can be framed for different classes of employees but within the guidelines. So Maximum tax exemption for VRS Compensation will be Rs 500,000/- for government & private sector employees. Section 10(10C) of Income Tax Act & Rule 2BA of Income Tax rules deals with taxation and exemption of VRS Compensation.
Any amount received or receivable by an employee of —
- A public sector company
- Any other company
- Authority established under a Central, State or Provincial Act
- A local authority
- A co-operative society
- A university established under a Central, State or Provincial Act or covered under the University Grants Commission Act
- Notified Indian Institute of Technology
- Notified Institute of Management
- Indian Institute of Foreign Trade, New Delhi
- Any State Government
- Any Central Government
- Any other Institute notified by Central Government.
At the time of his voluntary retirement under a scheme framed in accordance with guidelines prescribed by Rule 2BA. However an Employee of Public Sector Company should have completed 10 years of service or completed 40 years of age.
Exemption is Least of the following.
1) Actual amount received under VRS.
2) Rs. 5 lakhs (to be reduced by total exemptions claimed in past years) in total from one or more employers
3) Last Drawn Salary multiplied by 3 months’ salary for each completed year of service.
4) Last Drawn Salary multiplied by Balance Nos. of Months of Service Left (Refer Rule 2BA also).
Where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under this clause shall be allowed to him in relation to such, or any other assessment year.
Guideline for Voluntary Retirement Compensation
- It applies to all employees, including workers and executives (but not directors), who have completed 10 years of service or completed 40 years of age.
- Where such exemption has been allowed any time in the past, no exemption shall be allowed in any other subsequent year.
- The vacancy caused is not to be filled up, nor is the retiring employee to be employed in another company or concern belonging to the same management. VRS should result in overall reduction in the existing strength of the employees
- Where this exemption has been allowed to any employee for any year, it shall not be allowed to him for any other year.
- The exemption up to Rs 5 lakh is available on the entire VRS amount, even if paid in installments in different years.
Reference: Section 10(10C) of Income Tax Act
10(10C) any amount received or receivable by an employee of—
(i) a public sector company ; or
(ii) any other company ; or
(iii) an authority established under a Central, State or Provincial Act ; or
(iv) a local authority ; or
(v) a co-operative society ; or
(vi) a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956 (3 of 1956) ; or
(vii) an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961) ; or
(viia) any State Government; or
(viib) the Central Government; or
(viic) an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette, specify in this behalf; or
(viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf,
on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company referred to in sub-clause (i), a scheme of voluntary separation, to the extent such amount does not exceed five lakh rupees :
Provided that the schemes of the said companies or authorities or societies or Universities or the Institutes referred to in sub-clauses (vii) and (viii), as the case may be, governing the payment of such amount are framed in accordance with such guidelines (including inter alia criteria of economic viability) as may be prescribed:
Provided further that where exemption has been allowed to an employee under this clause for any assessment year, no exemption there under shall be allowed to him in relation to any other assessment year :
Provided also that where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under this clause shall be allowed to him in relation to such, or any other, assessment year;