Tax Treatment of Compensation Received on Voluntary Retirement [Section 10(10C)]

Compensation received under a Voluntary Retirement Scheme (VRS) or Voluntary Separation Scheme is partially exempt from tax under Section 10(10C) of the Income Tax Act, 1961. Below is a detailed breakdown of the exemption rules, conditions, and calculations.

1. Eligibility for Exemption

The exemption applies to employees of:

• Public Sector Companies(PSUs)
• Private Companies
• Government Employees(Central/State)
• Local Authorities
• Universities & Educational Institutions
• IITs & Notified Management Institutes

2. Maximum Exemption Limit

The least of the following is exempt:

1. ₹5,00,000(lifetime limit).
2. Actual compensation receivedunder VRS.
3. 3 months’ salaryfor each completed year of service.
4. Salary × Balance months left before superannuation.

Example:

• Compensation received:₹8,00,000
• Last salary (Basic + DA):₹60,000/month
• Years of service:20
• Balance service left:4 years (48 months)

Exemption Calculation:

1. ₹5,00,000 (statutory limit)
2. ₹8,00,000 (actual compensation)
3. 3 months’ salary × 20 years= ₹60,000 × 3 × 20 = ₹36,00,000
4. Salary × Balance months= ₹60,000 × 48 = ₹28,80,000

Exempt Amount: ₹5,00,000 (least of above)

Taxable Amount: ₹8,00,000 – ₹5,00,000 = ₹3,00,000

3. Key Conditions for Exemption

1. Service Duration:Employee must have completed 10 years of service or 40 years of age (waived for PSU employees).
2. Scheme Compliance:VRS must be approved and result in workforce reduction.
3. Non-Reemployment:Retiring employee cannot join the same management group.
4. One-Time Benefit:Exemption can be claimed only once in a lifetime.
5. No Relief Under Section 89:If relief is claimed under Section 89, Section 10(10C) exemption is forfeited.

4. Taxability of Excess Amount

• Amount exceeding ₹5 lakhis taxable as “Income from Salaries”.
• Installment Payments:If received over multiple years, exemption is adjusted proportionally 15.

5. Comparison with Retrenchment Compensation [Section 10(10B)]

6. How to Claim Exemption?

• Submit Form 10E(if opting for relief under Section 89).
• Employer’s Role:Deduct TDS if taxable amount exceeds exemption.
• Reporting in ITR:Declare under “Income from Salaries”