Taxability of VRS Compensation

VRS, or The Golden Handshake, is a compensation that is exempted from tax either partially or completely. There are other post-retirement benefits such as gratuity and pension that also fall into the same category.


On sequestration, a government employee is usually entitled to a lot of retirement benefits, which is why government jobs are considered to be the most secure and much sought-after. But these perks are not tax-free. This is clearly specified under the heading ‘Salaries’ as returns in the place of of salaries as mentioned in section 17 (3) of the Indian Income Tax Act. Nevertheless, with regard to a few of them, being exempted from tax is allowed under section 10 of the law, either completely or partially.

Let us explore the exemptions in detail:

  1. Gratuity (Section 10 (10)):
    1. Any demise plus post retirement gratuity availed by Central and State Government staffs, Defense staffs and the same in local authority will be excused.
    2. Any gratuity availed by people under the Payment of Gratuity Act (1972) shall be exempted which is conditional on the certain restrictions. The first one is that for each year of service or part thereof, gratuity shall be waived off for up to fifteen days remuneration based on the previous salary rate. The next limitation is that the amount of gratuity must not be more than INR 10 lacs.
    3. For employees belonging to other categories, gratuity is exempted on a couple of conditions such as it being restricted to salary of 15 days (on the basis of past ten months’ average) for each service year with INR 10 lacs as the set limit.
    4. According to the Board’s letter F. No. 194/6/73-IT (A-1), which was dated on 6th June 1973, the waiver regarding gratuity is allowed even in cases of employment cessation or resignation. The taxed part of gratuity is eligible for relief u/s 89 (1).
    5. Gratuity disbursement to a widow and/ or other legatees of any staff member who passes away while in service is also excused from income tax as mentioned in Circular Number 573 dated on 12st August 1990.
  2. Compensation on VRS OR ‘Golden Handshake’ (Section 10 (10-C)):
    1. Money given to any worker of public sector or any other firms, authority established under Central, State or Provincial Act, Co-operative Societies, Local Authority, Universities, IITs and Notified Management Institutes etc.
    2. VRS under which the disbursement is being made should be enclosed in line with the recommendations in the Rule 2BA of Income Tax Rules. In the event of an organization other than a government one or a co-operative society, this scheme had to be authorized by the Chief Commissioner/ Director General of Income Tax until 2002.
    3. If tax-exemption is permitted under this section for any valuation year, it won’t be sanctioned concerning some other assessment year.
  3. Commutation of Pension (Section 10 (10-A):
    1. If the staffs of Central & State Government, Local Authority, Defence Services and any establishment Central or State Acts, the whole commuted value of pension is excused.
    2. For other employees, if they avail gratuity, the commuted value of one third of the retirement pension is excused, else, the commuted value of Y2 of the pension.
    3. Judges of Supreme Court and High Courts shall be eligible to exempt of commuted value up to Y2 of the retirement pension (Circular Number 623 dated on 6th January 1992).
  4. Encashment of Leave (Section 10 (10-AA)):
    1. Leave Encashment when in service is taxed, relief u/s 89 (1) if applicable can be filed for the same.
    2. Any disbursement by way of leave encashment enjoyed by Central & State Government workers when they retire regarding the period of earned leave at credit is completely excused.
    3. In case of other staff members, the exemption is to be restricted to the money paid for unused earned leave (earned leave privilege cannot be more than 30 days per one year of service, ten months’ salary or leave encashment availed until then, whichever is lesser. This is again limited to INR 3 lacs for sequestrations post 2nd April 1998.
    4. Leave remuneration paid to legatees of a late staff regarding privilege leave standing to the credit of such worker at the time of demise is not taxed.
  5. Retrenchment Compensation (Section 10 (10-B)):

    Retrenchment compensation given to a government servant as per the Industrial Disputes Act of 1947 or any other Act or Guidelines tax-exempted if the reimbursement calculated at an average pay for fifteen days for each active year in service. And it should not exceed INR 5 lacs.

Display of any trademarks, tradenames, logos and other subject matters of intellectual property belong to their respective intellectual property owners. Display of such IP along with the related product information does not imply BankBazaar's partnership with the owner of the Intellectual Property or issuer/manufacturer of such products.

This Page is BLOCKED as it is using Iframes.