When employment is brought to an end – whether by voluntary retirement or by retrenchment – the employer pays compensation that has its own exemption rules.
### A. Voluntary Retirement Compensation (VRS) – Section 10(10C)
Exempt = Lower of:
1. Actual amount received
2. Salary p.m. × 3 months × Completed years of service
3. Salary p.m. × Remaining months of service (till normal retirement age)
4. ₹5,00,000
Salary = Basic + DA(forming part) + CT (on last drawn basis).
Conditions for VRS exemption (broadly):
Scheme is in accordance with Rule 2BA.
Employee has put in 10 years of service or attained 40 years of age.
Exemption can be availed only once in a lifetime.
If exemption under sec 10(10C) is claimed, relief u/s 89 cannot be claimed on the same VRS amount.
### B. Retrenchment Compensation – Section 10(10B)
Exempt = Lower of:
1. Actual amount received
2. Amount computed under Industrial Disputes Act, 1947 (15 days' avg pay × completed years rounded for >6 months)
3. ₹5,00,000
> Both VRS and Retrenchment exemptions are subject to the ₹5,00,000 cap.
Worked example
### Example 1
VRS Example: Mr. X (age 52, served 22 yrs; balance service 96 m) opted for VRS, received ₹15,00,000. Last drawn salary p.m. = ₹40,000.
(i) 15,00,000;
(ii) 40,000 × 3 × 22 = 26,40,000;
(iii) 40,000 × 96 = 38,40,000;
(iv) 5,00,000.
Exempt = ₹5,00,000. Taxable VRS = ₹10,00,000.
### Example 2
Retrenchment Example: Mr. Y retrenched, received ₹4,00,000; ID Act amount = ₹3,20,000. Exempt = lower of (4,00,000; 3,20,000; 5,00,000) = ₹3,20,000. Taxable = ₹80,000.
⚠️ Common exam mistakes
Treating the whole VRS amount as exempt up to ₹5,00,000 without testing the other three limits.
Forgetting that VRS exemption can be claimed only once in a lifetime.
Claiming Section 89 relief along with VRS exemption u/s 10(10C) – mutually exclusive.
Including non-turnover commission while computing 'Salary' for the VRS formula.
Bare-Act text Section 10(10B); Section 10(10C); Rule 2BA · Income-tax Act, 1961 · click to expand
Section 10(10B) – any compensation received by a workman under the Industrial Disputes Act, 1947, or under any other Act… at the time of his retrenchment, to the extent it does not exceed an amount calculated in accordance with the provisions of clause (b) of section 25F of the Industrial Disputes Act, 1947 or such amount as the Central Government may, by notification, specify. Section 10(10C) – any amount received or receivable by an employee of (specified employers) at the time of his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement framed in accordance with such guidelines as may be prescribed, to the extent such amount does not exceed five lakh rupees.