# Expenses under Voluntary Retirement Scheme (VRS) [Section 35DDA]

## Key Rules

Deduction is allowed to ALL assessees (no resident/non-resident or entity-type restriction).
Deduction is granted in 5 EQUAL installments over 5 successive previous years beginning from the year of payment.
Deduction for P.Y. = 1/5 × Amount Paid under VRS

## Important Notes

The amount must be actually paid to qualify (not merely provided for).
VRS payments to employees represent compensation for voluntary retirement, typically a significant one-time outflow — Section 35DDA prevents the entire amount from distorting one year's profit by spreading the deduction.

Worked example

### Example 1

Example:

XYZ Ltd. paid ₹ 25,00,000 under a Voluntary Retirement Scheme to 10 employees during P.Y. 2025-26.

Deduction allowed per year = 25,00,000 / 5 = ₹ 5,00,000

Deduction is allowed in P.Y. 2025-26 and the four subsequent previous years (2026-27, 2027-28, 2028-29, 2029-30) at ₹ 5,00,000 each.

⚠️ Common exam mistakes

Claiming the entire VRS payment as deduction in the year of payment — must be amortised over 5 years.
Allowing deduction in the year of provisioning rather than the year of actual payment — only ACTUAL PAYMENT triggers the 5-year amortisation.
Discontinuing the residual deduction if the business is taken over / restructured — even on succession of business, the remaining deduction goes to the successor.

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

Section 35DDA(1) — 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 instalments for each of the four immediately succeeding previous years.

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VRS Expenditure under Section 35DDA

Worked example

⚠️ Common exam mistakes