Taxability of VRS compensation

Section 10(10C) of the Income-Tax Act, 1961 exempts payments received by a salaried employee from the employer under a Voluntary Retirement Scheme up to Rs 5 lakh. The law requires that the scheme should be framed in accordance with the guidelines prescribed in Rule 2 BA of the I-T Act. No relief is available if the scheme is not approved prior to the date of voluntary retirement. Subsequent approval will not entitle a retired employee to claim exemption. Section 10(10C) was inserted to make voluntary retirement attractive. Finance Act, 2003 amended Section 10(10C) so as to provide exemption from tax even if the amount received on voluntary retirement is paid in instalments. . Guidelines for the scheme were framed under Rule 2BA which was inserted by the I-T (Sixteenth Amendment) Rules, 1992. The Rule prescribes that the scheme will be applicable to employees who have completed 10 years of service or reached the age of 40. It is also required that the scheme should result in overall reduction in the existing strength of employees. Vacancy caused by voluntary retirement is not to be filled up. The employee on retirement cannot be reemployed in any company under the same management. These are rather stringent rules.