Retiring early with VRS? Know its’ taxation

In the case of former BSNL employee Smt Govindarajulu, it was initially believed she was receiving compensation under a Voluntary Retirement Scheme (VRS). However, due to her subsequent discovery of favorable legal precedents, she filed an appeal seeking tax exemption on the entire ex-gratia payment. ITAT Chennai ruled in her favor, granting relief on this matter.

The ITAT Chennai ruling determined that the BSNL VRS-2019 Scheme had characteristics of a Government-approved retrenchment compensation scheme, which qualified the ex-gratia compensation for exemption under Section 10(10B) of the Income-tax Act. This exemption applies to retrenchment compensation received under the Industrial Disputes Act, 1947, or any other law, up to a maximum amount of Rs 5 lakh, whichever is lower.

Chartered Accountant Suresh Surana explained that the tax treatment of VRS compensation depends on the nature of the employer, the scheme, and the specific provisions of the Income-tax Act. Under Section 10(10C), employees of public sector companies, local authorities, and other notified institutions can claim up to Rs 5 lakh in tax exemption for compensation received during voluntary retirement.

However, if the payment is considered retrenchment compensation, the employee may be eligible for exemption under Section 10(10B) instead.

The key difference between VRS and retrenchment compensation lies in the specific tax exemption provisions. While Section 10(10C) offers a tax exemption of up to Rs 5 lakh for voluntary retirement, Section 10(10B) provides exemption for retrenchment compensation under the Industrial Disputes Act, 1947, up to a maximum of Rs 5 lakh.