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Taxability of amount received on Voluntary Retirement under Voluntary Retirement Scheme or any similar scheme
[Updated as on Mar 31, 2020]
Taxability of amount received by an individual on voluntary retirement under voluntary retirement scheme or any similar scheme is governed by Section 10(10C) of the Income Tax Act, 1961.
Amount of exemption
Any amount received or receivable by an employee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or a scheme of voluntary separation in the case of a public sector company shall be exempt, to the extent such amount does not exceed five lakh rupees.
Conditions to be fulfilled
1. This exemption is applicable to the employees of:
(i) a public sector company ; or
(ii) any other company ; or
(iii) an authority established under a Central, State or Provincial Act ; or
(iv) a local authority ; or
(v) a co-operative society ; or
(vi) a University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act,1956 (3 of 1956) ; or
(vii) an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961) ; or
(viia) any State Government; or
(viib) the Central Government; or
(viic) an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette, specify in this behalf; or
(viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf,
2. The schemes governing the payment of such amount are framed in accordance with the guidelines as are prescribed in Rule 2BA of the Income Tax Rules which are enumerated below :—
(i) it applies to an employee who has completed 10 years of service or completed 40 years of age. In case a company has been set up for less than 10 years at the time of such voluntary retirement or separation, then its employees are not eligible to the exemption under this clause.
This requirement is not applicable in case of amount received by an employee of a public sector company under the scheme of voluntary separation framed by such public sector company.
(ii) it applies to all employees (by whatever name called) including workers and executives of a company or of an authority or of a co-operative society, as the case may be, excepting directors of a company or of a co-operative society;
The companies can frame different schemes of voluntary retirement for different classes of their employees. However, these schemes have to conform to the guidelines prescribed in rule 2BA of the Income-tax Rules [Circular No.640 dated 26/11/1992]
(iii) the scheme of voluntary retirement [or voluntary separation] has been drawn to result in overall reduction in the existing strength of the employees;
(iv) the vacancy caused by the voluntary retirement [or voluntary separation] is not to be filled up;
(v) the retiring employee of a company shall not be employed in another company or concern belonging to the same management;
(vi) the amount receivable on account of voluntary retirement [or voluntary separation] of the employee does not exceed the amount equivalent to [three months’] salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. The expression "salary" for the purpose of this rule, includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites. The three month salary should be computed based on the last drawn salary.
3. Exemption once allowed to an employee under this clause for any assessment year, no exemption shall be allowed to him in relation to any other assessment year.
4. Where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under this clause shall be allowed to him in relation to such, or any other, assessment year. This has been added as a proviso to both section 10(10C) and section 89 to prevent the assessees from claiming exemption under both. Thus the assessee can claim either relief under section 89 or the exemption under this clause and not both in respect of the amount received under voluntary retirement or separation as the case may be.
Relief under Section 89
Alternatively to the exemption available under section 10(10C), an assessee can claim the relief available under Section 89. Relief under section 89 is calculated as per the provisions of Rule 21A. Rule 21A(1)(c) provides that where:
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An assessee receives payment in the nature of compensation from his employer or former employer, and
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Payment is made at or in connection with the termination of his employment, and
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He has rendered continuous service for not less than three years, and
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the unexpired portion of his term of employment is also not less than three years,
he shall be granted relief in accordance with the provisions of sub-rule (4) as given below;
Filing of Form No.10E
Rule 21AA requires that where an assessee, being a Government servant or an employee in a [company, co-operative society, local authority, university, institution, association or body], is entitled to relief under sub-section (1) of section 89, he may furnish to the person responsible for paying any income chargeable under the head "Salaries", the particulars specified in Form No. 10E. Now IT department requires assessees to file this form electronically through the e-filing portal. Form 10E has to be filed electronically where the assessee wishes to claim relief under Section 89 instead of availing the exemption under Section 10(10C).
Selecting the best option
There is no clear cut formulae to judge which will be beneficial to an assessee. It varies for different assessees and will be dependent on their taxable income and tax slabs in which they are for the current previous year as well as for the preceding three previous years. Each assessee shall work out separately to find which is beneficial to them and go for it. However in cases where the scheme under which the compensation is awarded is not in accordance with the conditions laid out in rule 2BA, then the assessee can straightaway opt for relief under section 89 as he becomes ineligible to claim the exemption under section 10(10C).
Illustration
Mr.Ashok retired on 31/08/2019 after 36 years of completed service and with 3 year of service left from a PSU under a scheme of Voluntary Retirement Scheme framed in accordance with Rule 2BA of the Income Tax Rules. He received compensation of Rs.2400000 on 25/09/2019. Salary including DA received by him at the time of retirement was Rs.75000. His total income for the FY 2019-20 excluding compensation is Rs.750000. Also his total income and tax paid for the FYs 2016-17, 2017-18 & 2018-19 are as follows:
FY Total income Tax paid
2016-17 565000 39140
2017-18 580000 29355
2018-19 675000 49400
Computation of the amount exempted:
Option A- Exemption under Section 10(10C
As per Rule 2BA, the exemption under section 10(10C) shall be available only if the conditions laid out in the said rules are complied with. Assuming other conditions (i) to (v) are fulfilled, lets check the ceiling amount of the amount payable as compensation as mentioned in condition (vi).
Ceiling amounts are:
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three months salary for each completed year of service => 3*75000*36 => Rs.8100000
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salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation => Rs.2700000
It has been clarified vide Circular No.640 dated 26/11/1992 that Item (vi ) of rule 2BA does not require that the amount representing the lower of the aforesaid two limits is to be allowed under the scheme of voluntary retirement. The amount receivable by an employee on account of his voluntary retirement can be either of the aforesaid two amounts. However, the amount which will qualify for exemption under section 10(10C) will be up to rupees five lakhs only.
Here the compensation actually received does not exceed the limits set forth and hence it is eligible for the exemption available under Section 10(10C) which is Rs.5 lakhs.
The taxable amount will be: Rs.24 lacs – Rs.5 lacs => Rs.19 lacs
The tax payable for the FY 2019-20 for the total taxable income of Rs.26.5 lacs [Rs.7.5 lacs + Rs.19 lacs] => Rs.631800
Option B- Relief under section 89
If the assessee opts for relief under section 89, then it shall be computed as follows:
The tax payable for FY 2019-20 will be Rs.619800 [Rs.787800 – Rs.168000]
Here Mr.Ashok can choose option B and opt for relief under section 89 as it appears to be more beneficial for him as there is a saving in tax for Rs.12000.
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