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.
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:
As per this section, the amount that an employee receives for his/her service in;
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.
Following are the steps to calculate refile under section 89:
Firstly, calculate the total tax payable on the income, which includes additional salary, arrears or compensations, in the year you receive the compensation
Now, Calculate the tax rate on total taxable income during the year in which you receive the compensation
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.
Now, Calculate the rate of tax for each preceding three years individually.
Next, compute the average of rate of tax for three preceding years.
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.
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:
No, both section 10(10C) and section 89 are mutually exclusive. This means that one can only claim either of the two.
Exemption of INR 5 lakhs is a one-time exemption, i.e. an employee can claim this exemption only once in a lifetime.