In case of retiring employees or whenever any employer organisation decides to introduce a scheme of Voluntary Retirement from the service, common issue employee’s face is Taxability of amount since the amount is a significantly large resulting in considerable Tax liability on the Total Income. Besides this there are Tax considerations with respect to gratuity and EL Encashment as well.
The Voluntary Retirement Compensation is a part of Salary and taxable under the same head of Income. (Defined in Section 17).
Total income of the resident person includes all the income from whatever source derived which-
(a) Is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) Accrues or arises or is deemed to accrue or arise to him in India during such year ; or
(c) Accrues or arises to him outside India during such year
The amount is taxable in the year of accrual or receipt, whichever is earlier (i.e. whether paid or not).
- VRS/VSS Compensation
The tax Compensation for employees opting for Voluntary Retirement scheme(VRS) or Voluntary Separation scheme(VSS) or Golden Handshake as it is d sometimes referre, is governed by Section 10(10C)
Major Tax Issues / exemptions in this case are as follows
- Voluntary Retirement Compensation is a part of Salary and taxable under the same head of Income.
- Where an employee receives compensation(whether in one go or in instalments) on voluntary retirement or separation, exemption for such amount is limited, The least amount of the following is exempt from Income tax:
- 3 months salary for each completed year of services or
- Salary at the time of retirement X No. of months of services left for retirement; or
- 5,00,000
- As stated earlier the income is taxable in the year of accrual or receipt, whichever is earlier (i.e. whether paid or not). So, even if part of the compensation is received in this year and balance is received in next year or any subsequent year, it will get taxed in this year only, since it is has already accrued in the current year.
- No other exemption/ rebate/ deduction can be availed if exemption u/S. 10(10C) is availed in respect of the amount of VRS Compensation.
- Exemption u/S 10(10C) cannot be availed if Rebate U/s 89 is already availed. Also similar provision is inserted under Section 89 stating that if exemption u/S 10(10C) is availed already then rebate U/S 89 cannot be availed.
This means that subject to other conditions, a maximum of Rs. 5,00,000 is exempt as provided under Section 10(10C). The requirements to be met for being eligible for this exeption under section 10(10C) are :
The exemption applies to the amount received by an employee 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 (or | |
| (vii) | an Indian Institute of Technology within the meaning of clause (g)15 of section 3 of the Institutes of Technology Act, 1961 (59 of 1961); or | |
| [(viia) | an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette17, 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,] |
Rule 2BA –Further at the time of his voluntary retirement [or voluntary separation] shall be exempt under clause (10C) of section 10 only if the scheme of voluntary retirement framed is in accordance with the following requirements, namely :—
| (i) | it applies to an employee who has completed 10 years of service or completed 40 years of age; | |
| (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;] | |
| (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 |
However the requirement of (i) above would not be 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.
- B) Leave Encashment
This is covered under Section 10(10AA) & For tax treatment of leave encashment the employees has been classified into two types
1) Govt Employees and
2) Non Government employees
The Tax Treatment of Leave encashment at the time of retirements / resignation/ VRS/ VSS is as follows:
- Leave Encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.
- In case of Non-Govt employees (PSU employees are also considered as non-govt employees), the exemption is to be limited to a maximum of 10 months of leave encashment, based on last 10 months average salary. This is further subject to a limit of maximum limit of Rs. 3,00,000/-.
- Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is totally exempted.
- In case of termination of service (not same as separation), the Leave encashment is taxable.
- C) Gratuity
Gratuityis a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company.Gratuity is payable when an employee completes five or more years of full time service with the employer. Taxability of gratuity varies depending on the recipient.
- In case ofgovernment employees there is no tax on the gratuity
In case of private sector employees, if they are covered under the Payment of Gratuity Act, 1972, then the gratuity is exempt from tax subject to a maximum of Rs 10 lakh or 15 days salary for each completed year of service (or part thereof). Where the gratuity is received in any of the previous years and if any exemption was allowed for the same, then the exemption to be allowed during the retirement year gets reduced to the extent of exemption already allowed, subject to the overall limit
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