VRS and Income Tax

What is Voluntary Retirement Scheme?

VRS is a monetary facility provided by the corporates for the retrenchment of some of its employees due to various reasons related to employees and the company. It is opted by an employee that wishes to voluntarily end his or her service tenure at the organization before his or her retirement date. The scheme is provided by both public and private companies. It is often termed as the “Golden Handshake”.

Who can opt for the VRS?

It is applicable only to a person that has completed 10 years’ service in the organization. The person must be above the age of 40 years. · It applies to all employees, including workers and executives of the company, except the director of the company or cooperative society.

An Individual can receive VRS from more than one company in his lifetime. But he can plan his tax liability only once.

What are the conditions?

An employee who wishes to opt for the VRS shall not be employed in another company or concern belonging to the same management
The amount receivable must not, at any point, exceed the amount equivalent to three months’ salary for each completed year of service.
Or salary at the time of retirement multiplied by the balance months of service left prior to the date of retirement of the employee.
The vacancy generated due to VRS cannot be filled up by another employee.
Prior permission of the Government needs for Public sector undertakings before offering voluntary retirement.

Income Tax head for receipt of VRS

VRS is included in Salary head in Income Tax Act as “PROFIT IN LIEU OF SALARY” u/s 17(3) of the Income Tax Act,1961. Accordingly, the VRS received is taxable in the hands of the employee under the head ‘Income from Salary’.

“profits in lieu of salary” includes—

the amount of any compensation due to 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 relating thereto.

Exemption of VRS amount

The benefit of receipt VRS can avail in two ways –

Exemption U/s- 10(10C)
Relief U/s- 89

1.VRS amount received is exempted under Section 10(10C) in the following way: –

Any amount received or receivable by an employee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement of –

(i) a public sector company; or

(ii) any other company; or

(iii) an authority established under a Central, State or Provincial Act; or

(iv) a local authority; or

(v) a co-operative society; or

(vi) a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act,1956 (3 of 1956); or

(vii) an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961); or

(viia) any State Government; or

(viib) the Central Government; or

(viic) an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette, specify in this behalf; or

(viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf,

is exempt to the lowest of the following amount:

5.00 lakhs.
Amount equivalent to three months’ salary for each completed year of service.
Amount of salary at the time of retirement for the balance period of months of service left before retirement.

2. However, in place of exemption of sec 10 (10c) assess can claim relief under Section 89 for the amount of VRS received by him due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed. Relief under section can be calculated as per the following steps.

The Computation of relief is as follows: –

Step 1.: – Compute the Tax payable during the previous year in which the compensation is received.

Step 2.: – Compute the rate of tax on total income during the previous year in which the compensation is received.

Step 3.: – Compute the tax on total income by adding the 1/3^rd of VRS amount received in each of the three preceding previous years immediately preceding the year in which the VRS is received.

Step 4.: – Compute the rate of tax for each preceding three years separately.

Step 5.: – Compute the average of rate of tax for three preceding years.

Step 6.: – Amount of relief = VRS amount X [Step 2 – Step 5]

KEYNOTE: –

As per Income Tax Act,1961 both the sections are mutually exclusive, i.e. an assessee can claim either exemption u/s 10(10C) or relief u/s 89 whichever is most beneficial to him. And if an exemption or relief is claimed in any assessment year, it cannot be claimed again in any other assessment year.