# Section 35DDA: Expenditure on Voluntary Retirement Scheme

When an employer pays compensation to employees under a VRS, the full amount is not deductible in the year of payment. It is amortised.

## The Rule

Eligible: All assessees (companies, firms, individuals, etc.)
Deduction: Allowed in 5 equal annual installments, starting from the year of payment.
Each year: 1/5th of the VRS expenditure.

## What If the Business Restructures?

If during the 5-year amortisation period there is an amalgamation or demerger:

The balance deduction continues with the new (successor) entity for the remaining period.
The year of amalgamation/demerger is included in the balance period (it is not an extra year).

The total deduction remains exactly the same; only the entity claiming it changes.

Worked example

### Example 1

Example 1 — Simple amortisation: Company pays Rs. 25,00,000 as VRS compensation in PY 2026-27.

Deduction per year = 25,00,000 / 5 = Rs. 5,00,000 in each of PY 2026-27 through PY 2030-31.

### Example 2

Example 2 — Amalgamation midway: Same VRS payment of Rs. 25,00,000 in PY 2026-27. The company is amalgamated with another in PY 2028-29.

PY 2026-27: original company claims Rs. 5,00,000
PY 2027-28: original company claims Rs. 5,00,000
PY 2028-29 (year of amalgamation): amalgamated company claims Rs. 5,00,000
PY 2029-30: amalgamated company claims Rs. 5,00,000
PY 2030-31: amalgamated company claims Rs. 5,00,000

No extra year is granted because of the amalgamation.

⚠️ Common exam mistakes

Claiming the entire VRS payment in the year of payment.
Treating the year of amalgamation/demerger as an additional year (it is counted within the 5-year window).
Restarting the 5-year period when the business amalgamates.
Forgetting that this deduction is available to ALL assessees, not just companies.

Bare-Act text Section 35DDA · Income-tax Act, 1961 · click to expand

Section 35DDA: Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, one-fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal installments for each of the four immediately succeeding previous years.

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Section 35DDA - Voluntary Retirement Scheme (VRS) Expenditure

Worked example

⚠️ Common exam mistakes