VRS (Voluntary Retirement Scheme) – exemption from income tax

Voluntary retirement scheme (VRS) is an early retirement option given by the employer to its eligible employee by compensating them for taking a early retirement. Most of the public sector banks, PSU and private companies opted for voluntary retirement scheme (VRS) in past to restructure there organization. Voluntary retirement scheme (VRS) is also accepted by trade union as it’s legally allowed by companies to off-load there surplus manpower.

Income tax act provides an exemption up to Rs. 5, 00, 000 for Voluntary retirement scheme i.e. amount received up to Rs. 5, 00,000 will be exempted and the balance amount will be taxable in the hands of employee under the head salary. 

Certain conditions to be fulfilled to get exemption for VRS

The company may frame different voluntary retirement scheme (VRS) rules for different employees but to get exemption under income tax act the policy should follow the conditions laid down in the income tax rule. The guidelines are in rule 2BA of income tax rules and provides following requirement to claim exemption;

• It applies to an employee of the company who has completed ten years of service or completed 40 years of age
• It applies to all employees (by whatever name called), including workers and executives of the company excepting Directors of the company
• The scheme of voluntary retirement has been drawn to result in overall reduction in the existing strength of the employees of the company
• The vacancy caused by voluntary retirement is not to be filled up, nor the retiring employee is to be employed in another company or concern belonging to the same management
• 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
• The employee has not availed in the past the benefit of any other voluntary retirement scheme (VRS).

Any person who has claimed relief under section 89 (1) of income tax act will not be eligible for exemption under this section for the voluntary retirement scheme (VRS).