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Tax Implications on VRS Compensation

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Yesha Dalwadi

Income Tax
Tax Benefits
VRS
VRS Taxability

Voluntary Retirement Scheme – VRS also known as ‘The Golden Handshake’ is an option that is provided to employees of an organisation to retire voluntarily from the services before the actual date of retirement. Under this scheme employees who decide to exercise this option will get a one-time lump sum payment called Voluntary Retirement Compensation.

There are several reasons for a company deciding to offer VRS, the most common reasons include reducing the cost of the operations by retrenching the surplus workforce. This article will give detailed information on VRS and its taxability in India.

What are the Tax Implications on VRS Compensation?

Under section 17(3) of the Income Tax Act, VRS falls under ‘Profit in Lieu of Salary’. As per the definition ‘Profit in Lieu of Salary’ is the amount of any compensation due or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions.

VRS is taxable in the hands of the employees and under the head ‘Income from Salary’. The following are the aspects that one needs to take into account while calculating the tax implications for VRS:

Exemption Under Section 10(10C)

As per this section, the amount that an employee receives for his/her service in;

Relief Under Section 89

Section 89 provides relief to mitigate the additional tax burden that may arise because of a large sum of money that suddenly paid in advance (in the form of VRS) or in arrears in a particular year. Individuals who wish to claim a relief u/s 89 must make sure to file form 10E before filing their income tax online.

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Don't miss another Income Tax due date. Check out this amazing tax calendar for 2020 by Quicko.
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How to Calculate Relief Under Section 89?

Following are the steps to calculate refile under section 89:

  1. Calculate the total tax payable

    Firstly, calculate the total tax payable on the income, which includes additional salary, arrears or compensations, in the year you receive the compensation

  2. Compute the tax rate

    Now, Calculate the tax rate on total taxable income during the year in which you receive the compensation

  3. Calculate the tax on total income

    Next, calculate the tax on total income by adding 1/3rd of the VRS amount received in each of the three preceding previous years immediately preceding the year in which the VRS is received.

  4. Compute the rate of tax

    Now, Calculate the rate of tax for each preceding three years individually.

  5. Compute the average of rate of tax

    Next, compute the average of rate of tax for three preceding years.

  6. Amount of Relief

    Finally, calculate the amount of relief = VRS amount X [Step 2 – Step 5]

It is important to note that both section 10(10C) and section 89 are mutually exclusive. It means that an individual can only claim either exemption u/s 10(10C) or relief u/s 89. Moreover, if one claims an exemption or relief in any assessment year then it cannot be claimed again in any other assessment year.

Who is Eligible to Claim VRS?

The list of eligible employees as per Sec 10(10C) who can claim VRS Exemption includes employees of ‘any other company’. Thus, private sector employees can claim exemption subject to the following conditions as per Rule 2BA:

FAQs

Can I claim both exemption and relief for the VRS Compensation?

No, both section 10(10C) and section 89 are mutually exclusive. This means that one can only claim either of the two.

Can I claim exemption on VRS Compensation for more than one year?

Exemption of INR 5 lakhs is a one-time exemption, i.e. an employee can claim this exemption only once in a lifetime.

Got Questions? Ask Away!

  1. Hey @HarshitShah

    VRS Compensation is taxable as profits in lieu of Salary as per section 17(3) of the Income Tax Act. Any employee of the government or local authority or PSU or any other company etc, is eligible to claim a deduction u/s 10(10C) up to INR 500,000/- if certain conditions are complied with and the scheme is framed as per Rule 2BA of Income Tax Rules.

    It is to be noted that this exemption can be claimed only once in a lifetime.

    Hope this helps! :slight_smile:

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