What CBDT’s new VRS clarification means

In response to recent legal disputes surrounding voluntary retirement schemes (VRS), the Central Board of Direct Taxes (CBDT) issued a clarification notification on October 22, 2026. The notification addressed the tax treatment of ex-gratia compensation received by employees retiring under the Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) Voluntary Retirement Scheme, 2019 (VRS-2019).

The CBDT clarified that the ex-gratia payment under BSNL and MTNL VRS-2019 is considered compensation for voluntary retirement under Section 10(10C) of the Income Tax Act, 1961, rather than retrenchment compensation under Section 10(10B). This distinction is crucial, as Section 10(10C) permits a tax exemption of up to Rs 5 lakh for voluntary retirement, whereas Section 10(10B) provides exemption for retrenchment compensation.

Employees who had previously claimed or intended to claim exemption under Section 10(10B) will now need to reassess their tax positions in light of the CBDT's clarification. The notification does not alter the existing tax exemption provisions but ensures that BSNL and MTNL VRS-2019 compensation is treated as voluntary retirement compensation under Section 10(10C), not retrenchment compensation under Section 10(10B).