VRS Tax Benefits under employment

Voluntary retirement scheme is a mechanism used by employees seeking retirement earlier than their actual retirement due date. Under VRS employees are not forced to leave their job but they choose voluntarily to terminate their employment. Employers or companies offer this scheme to their employees for multiple reasons beneficial to organisation as well. Employees opting for VRS are usually offered a compensation package. This package can include financial benefits like a lump sum amount, pension benefits, and other incentives. In return, the employers enjoy cost reductions, human resource workforce restructuring and avoiding layoffs as well.

What are the retirement benefits to an employee?
An employee opting for VRS has to consider all the provisions of the scheme. To opt for VRS the employee needs to be employed in the same company for a specified period as decided by the employment agreement. Usually in India people retire at the age of 58 or 60, however some people opts to retire voluntarily in their late 40s or late 50s.

Employees receive various benefits upon retirement which also applies to the employees seeking voluntary retirement. Some of these benefits are:

• Gratuity:
• Gratuity is a benefit given by the employer to employees in various events. A recently approved amendment by the government has increased the maximum limit of gratuity exemption which is up to Rs.20 lakh from the previous limit of Rs.10 lakh, which comes under Section 10(10) of the Income Tax Act. An employee receives gratuity upon retirement as well. Hence it applies to employees opting for VRS.
• Provident Fund:
• A provident fund​ is an investment fund that is voluntarily established by Employer and employees to ensure long term savings to support an employee’s retirement. An employee may withdraw his PF before retirement, but usually people opt to receive their PF at the time of retirement.
• Leave encashment:
• An employee may receive consideration for not utilising his unused leaves at the time of retirement or resignation. The employee can avail of encashment through their accumulated paid leave. Any amount received as Leave Encashment at the time of retirement by an employee of the Central Government or a State Government is fully exempt.

The leave encashment for non-government employees is exempt till a certain limit. This limit was Rs.3 lakh previously which is now increased to Rs.25 lakh under section 10(10AA).

Section 10(10C):
Under VRS, companies settle employee provident fund, various arrears or allowances and gratuity obligations at the time of retirement.

Section 10(10C) specifies that, any amount received or receivable by an employee of authorities specified in this section is exempt from tax on his voluntary retirement or termination of his service to the extent such amount does not exceed five lakh rupees.

One has to keep in mind that this exemption is available to employee for the assessment year in which he receives this compensation. No exemption shall be allowed to him in any other assessment year.

If the employee has claimed relief from taxes under section 89 in any assessment year in respect of any amount received or receivable on his voluntary retirement no exemption under this clause shall be allowed to him in relation to such, or any other, assessment year. This means he will not be allowed to claim the exemption benefit of Rs.5,00,000 if he has claimed relief under section 89 in relation to such compensation.

Conclusion:
A company may offer VRS to employees to reduce costs, restructure workforce or an employee may simply choose to voluntary end his employment. VRS compensation upto Rs.5,00,000 is exempt from taxes. However, one has to keep in mind the conditions specified in the section to claim such exemption because it will be allowed only for the year in which it is received or year in which it is claimed as exemption in case of multiple VRS.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.