VRS Tax Exemption: Section 10 10C, Rs 5 Lakh on Voluntary Retirement

Ramesh, a 52-year-old branch manager at a public sector bank, is offered a Voluntary Retirement Scheme payout of Rs 11 lakh. His first worry is not the cheque, it is the tax. He has heard that VRS money is tax-free, but nobody can tell him whether that means all of it or only a slice. This guide answers exactly that question, with the law, a checklist and a worked calculation.

The Rs 5 lakh exemption is not automatic. Your employer's scheme must satisfy every condition in Rule 2BA. Run down this checklist before you sign:

1. Length of service or age. The scheme must apply to an employee who has completed 10 years of service OR has completed 40 years of age. This single condition does not apply to an employee of a public sector company who retires under a voluntary separation scheme framed by that public sector company.
2. Who it covers. The scheme must apply to all employees, including workers and executives, but excluding directors of a company or of a co-operative society.
3. Purpose. The scheme must be drawn up to result in an overall reduction in the existing strength of the employees of the organisation.
4. Vacancy not refilled. The vacancy caused by the voluntary retirement must not be filled up.
5. No re-hiring within the group. The retiring employee must not be employed in another company or concern belonging to the same management.
6. Amount ceiling. The amount receivable must not exceed the lower of: (a) three months' salary for each completed year of service, OR (b) salary at the time of retirement multiplied by the balance months of service left before normal retirement.

For companies other than public sector companies, the scheme must additionally be approved by the Chief Commissioner or Director General of Income Tax.

The exemption is the least of three figures: Rs 5 lakh, the Rule 2BA amount-ceiling computation, and the actual amount received. For most retiring employees with long service, the Rs 5 lakh cap is the binding number.

Section 10(10C) carries a strict one-shot rule. If the exemption has been allowed to you in any one assessment year, it cannot be claimed again in any other assessment year. So if you change jobs and a second employer later offers another VRS, you cannot exempt that second payout. Plan accordingly: take the exemption against the larger payout if you ever expect two.

You cannot stack the 10(10C) exemption on top of Section 89 relief for the same money. The statute is explicit: if relief under Section 89 has been allowed to you for any amount received on voluntary retirement, separation or termination in any assessment year, then the Section 10(10C) exemption shall not be allowed to you for any other assessment year, and vice versa. Pick the route that saves you more tax. For most people the flat Rs 5 lakh exemption is simpler and larger; Section 89 spreading may help only in unusual cases.

1. Collect Form 16 from your employer; the exempt portion should appear under exempt allowances and the taxable balance under salary.
2. In the ITR, enter the gross VRS amount as part of salary, then claim the exempt portion (up to Rs 5 lakh) under the “exempt income” or Section 10(10C) field.
3. Keep the VRS scheme document and the employer's computation sheet on file in case the Assessing Officer asks for proof of Rule 2BA compliance.
4. If you are choosing between 10(10C) and Section 89, compute both before filing and claim only one.

• Assuming the whole payout is tax-free. Only Rs 5 lakh is exempt; the rest is salary income.
• Ignoring Rule 2BA. If the scheme does not meet the Rule 2BA conditions, no part of the payout is exempt under this section.
• Claiming both 10(10C) and Section 89 on the same VRS amount. The law bars the double benefit.
• Trying to claim the exemption twice across two employers or two years. It is a once-in-a-lifetime benefit.
• Forgetting the director exclusion. Directors of a company or co-operative society are outside the Rule 2BA scheme.

No. Only up to Rs 5,00,000 is exempt under Section 10(10C). Any amount above Rs 5 lakh is taxable as salary income at your slab rate.

Yes. Since the Finance Act 1992, the benefit extends beyond public sector companies to any other company, provided the scheme meets Rule 2BA and, for non-PSU companies, is approved by the Chief Commissioner or Director General of Income Tax.

No. If you have claimed the Section 10(10C) exemption in any assessment year, you cannot claim it again in any other year. It is strictly a once-in-a-lifetime benefit.

You need either 10 years of completed service OR 40 years of age. This condition is waived for employees of a public sector company retiring under that company's voluntary separation scheme.

No. The law does not allow both on the same VRS amount. If Section 89 relief is allowed for the VRS money, the 10(10C) exemption is denied, and vice versa. Choose whichever saves more tax.

The maximum exemption under Section 10(10C) is Rs 5,00,000. The actual exempt figure is the least of Rs 5 lakh, the Rule 2BA computed ceiling, and the amount actually received.

No. Rule 2BA excludes directors of a company or of a co-operative society from the scheme, so their payouts do not qualify for the 10(10C) exemption.

Public sector companies, any other company, an authority or local authority, a co-operative society, a university, an Indian Institute of Technology, notified institutes of management, and certain notified bodies, as listed in Rule 2BA.

If your employer is vague about whether its scheme is Rule 2BA compliant, or a public sector employer will not share the scheme document, you can file an RTI. Use the AI RTI Drafter to draft a clean application asking for the certified VRS scheme document and the approval order. Public sector banks, PSUs and government bodies are public authorities under the RTI Act 2005.

• Section 10(10C), Income-tax Act 1961, and Rule 2BA, Income-tax Rules 1962 (incometaxindia.gov.in)
• CBDT Circular No. 640 dated 26-11-1992, guidelines for Section 10(10C)
• ClearTax and TaxGuru commentary on Section 10(10C) and Rule 2BA

• Leave encashment tax exemption under Section 10(10AA)
• Section 80CCD(1B): extra Rs 50,000 NPS deduction
• The RTI Act 2005
• AI RTI Drafter tool
• The RTI Playbook