Section 10(10C)- Tax Exemption on Voluntary Retirement Compensation

Section 10(10C) of the Income Tax Act provides tax exemption on compensation received by an employee under a Voluntary Retirement Scheme (VRS) or an Early Separation Scheme. This exemption is designed to provide financial relief to employees who opt for voluntary retirement.

Key Conditions for Exemption

1. Eligible Employees:
   • Employees of public sector companies(government-owned)
   • Employees of private companies(if VRS complies with government rules)
   • Employees of authorities/autonomous bodiesestablished under a Central/State Act
2. Maximum Exemption Limit:
   • ₹5 lakh(entire amount is tax-free if compensation ≤ ₹5 lakh)
   • If compensation exceeds ₹5 lakh, only the excess is taxable
3. Scheme Requirements:
   • Must be a properly approved VRS(not just a resignation)
   • Should comply with Rule 2BAof Income Tax Rules
4. One-Time Benefit:
   • Can be claimed only once in a lifetime

Examples of Tax Exemption Under Section 10(10C)

Example 1: Compensation Below ₹5 Lakh (Fully Exempt)

Scenario:

Mr. A, an employee of a PSU, takes VRS and receives ₹4 lakh as compensation.

Tax Treatment:

• Since the amount is ≤ ₹5 lakh, the entire ₹4 lakh is tax-free.

Example 2: Compensation Above ₹5 Lakh (Partial Exemption)

Scenario:

Ms. B, a bank employee, opts for VRS and gets ₹8 lakh as compensation.

Tax Treatment:

• Exempt amount: ₹5 lakh (maximum allowed)
• Taxable amount: ₹8 lakh – ₹5 lakh = ₹3 lakh(taxed as salary income)

Example 3: Multiple VRS Benefits (Only One Exemption Allowed)

Scenario:

Mr. C had taken VRS from a company in 2015 and claimed exemption on ₹3 lakh. In 2024, he takes VRS again from another firm and gets ₹6 lakh.

Tax Treatment:

• First VRS (2015): ₹3 lakh was exempt (lifetime limit reduced)
• Second VRS (2024):
  • Remaining exemption limit: ₹5 lakh – ₹3 lakh = ₹2 lakh
  • Exempt amount: ₹2 lakh (out of ₹6 lakh)
  • Taxable amount: ₹6 lakh – ₹2 lakh = ₹4 lakh

Example 4: Private Company VRS (Must Follow Rule 2BA)

Scenario:

A private company offers VRS, but the scheme does not meet Rule 2BA conditions. Mr. D receives ₹7 lakh.

Tax Treatment:

• Entire ₹7 lakh is taxable(since the scheme is not compliant).

Comparison with Other Retirement Benefits

Key Takeaways

✅ ₹5 lakh exemption is available once in a lifetime for VRS compensation.
📜 Scheme must comply with Rule 2BA (applicable for private sector employees).
⚠️ Resignation ≠ VRS (only approved schemes qualify).
💰 If compensation exceeds ₹5 lakh, only the excess is taxable.