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Taxability of amount received on Voluntary Retirement under Voluntary Retirement Scheme or any similar scheme

                     [Updated as on Mar 31, 2020]

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Taxability of amount received by an individual on voluntary retirement under voluntary retirement scheme or any similar scheme is governed by Section 10(10C) of the Income Tax Act, 1961. 

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Amount of exemption

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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 or a scheme of voluntary separation in the case of a public sector company shall be exempt, to the extent such amount does not exceed five lakh rupees.

 

 

Conditions to be fulfilled

 

  1.   This exemption is applicable to the employees 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,

 

  2.   The schemes governing the payment of such amount are framed in accordance with the guidelines          as are prescribed in Rule 2BA of the Income Tax Rules which are enumerated below :—

 

(i)     it applies to an employee who has completed 10 years of service or completed 40 years of            age. In case a company has been set up for less than 10 years at the time of such voluntary          retirement or separation, then its employees are not eligible to the exemption under this                clause.

 

This requirement is not applicable in case of amount received by an employee of a public sector company under the scheme of voluntary separation framed by such public sector company.

 

(ii)    it applies to all employees (by whatever name called) including workers and executives of a            company or of an authority or of a co-operative society, as the case may be, excepting                  directors of a company or of a co-operative society;

 

The companies can frame different schemes of voluntary retirement for different classes of their employees. However, these schemes have to conform to the guidelines prescribed in rule 2BA of the Income-tax Rules [Circular No.640 dated 26/11/1992]

 

(iii)   the scheme of voluntary retirement [or voluntary separation] has been drawn to result in                overall reduction in the existing strength of the employees;

 

(iv)   the vacancy caused by the voluntary retirement [or voluntary separation] is not to be filled            up;

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(v)    the retiring employee of a company shall not be employed in another company or concern              belonging to the same management;

 

(vi)   the amount receivable on account of voluntary retirement [or voluntary separation] of the              employee does not 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 before the date of his retirement on superannuation. The expression           "salary" for the purpose of this rule, includes dearness allowance, if the terms of employment          so provide, but excludes all other allowances and perquisites. The three month salary should          be computed based on the last drawn salary.

 

 3.   Exemption once allowed to an employee under this clause for any assessment year, no exemption           shall be allowed to him in relation to any other assessment year.

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 4.  Where any relief has been allowed to an assessee under section 89 for any assessment year in                respect of any amount received or receivable on his voluntary retirement or termination of service          or voluntary separation, no exemption under this clause shall be allowed to him in relation to such,          or any other, assessment year. This has been added as a proviso to both section 10(10C) and                section 89 to prevent the assessees from claiming exemption under both. Thus the assessee can            claim either relief under section 89 or the exemption under this clause and not both in respect of            the amount received under voluntary retirement or separation as the case may be.

 

 

Relief under Section 89

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Alternatively to the exemption available under section 10(10C), an assessee can claim the relief available under Section 89. Relief under section 89 is calculated as per the provisions of Rule 21A.  Rule 21A(1)(c) provides that where:

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• An assessee receives payment in the nature of compensation from his employer or former employer, and

• Payment is made at or in connection with the termination of his employment, and

• He has rendered continuous service for not less than three years, and

• the unexpired portion of his term of employment is also not less than three years,

 

he shall be  granted relief in accordance with the provisions of sub-rule (4) as given below;