Published 9 May 2026
Sub-clause (10C) of section 10 of the Income-tax Act, 1961 read with Rule 2BA -- the rupees five lakh exemption ceiling for VRS / Voluntary Separation Scheme compensation; the eight conditions under Rule 2BA; the eligible employer categories; the section 89 relief overlay; and the practitioner's framework for the typical mid-career VRS exit
Taxpayer Brief
When an employee accepts a Voluntary Retirement Scheme or Voluntary Separation Scheme offered by the employer -- typically as part of corporate restructuring, public-sector reform, or workforce rationalisation -- the lump-sum compensation received qualifies for a specific exemption of up to rupees five lakh under sub-clause (10C) of section 10 of the Income-tax Act, 1961, subject to compliance with the eight-condition test in Rule 2BA of the Income-tax Rules, 1962. The exemption is in addition to the gratuity exemption (RET-01), the leave encashment exemption (RET-02), and the commuted pension exemption (RET-03) -- a VRS package can therefore deliver substantial cumulative tax-free outflow. This article maps the framework, the eight conditions, the worked computation, and the section 89 overlay.
Complexity Matrix
Feature | Complexity Level | Primary Risk |
|---|---|---|
Standard public-sector VRS within Rule 2BA conditions | Low | Rs 5 lakh exemption straightforward |
Private-sector VRS with structured compensation | Medium | Rule 2BA condition tests; documentation |
VRS rejected by employer for some employees -- partial scheme | High | Rule 2BA(viii) uniform-application condition |
VRS coupled with redeployment / reengagement of same employee | Very High | Rule 2BA(vi) anti-rejoining condition |
1. The Statutory Framework -- Section 10(10C) and Rule 2BA
Component | Effect |
|---|---|
Sub-clause (10C) of section 10 | Exempts up to rupees five lakh of VRS / VSS compensation received by an employee from a specified employer where the scheme is in accordance with the conditions in Rule 2BA |
Rule 2BA of the Income-tax Rules, 1962 | Eight cumulative conditions the scheme must satisfy |
Specified employer categories (sub-clause 10(10C)) | Public-sector company; any other company; authority established under Central / State Act; local authority; co-operative society; university; Indian Institute of Technology; State Government; Central Government; specified institution |
Cap | Rupees five lakh per employee, lifetime aggregate |
2. The Eight Conditions under Rule 2BA
Condition | Specifics |
|---|---|
1. Scheme applies to employees who have completed 10 years of service or attained age 40 | Employees with shorter service / younger than 40 are excluded |
2. Scheme applies to all employees (other than directors) -- no discrimination | Cannot be a targeted or selective scheme |
3. Scheme is drawn to result in overall reduction of existing strength | The employer must reduce headcount; not a pretext for replacement |
4. The vacancy caused by VRS shall not be filled up | Replacement of the VRS-departing employee is prohibited |
5. The retiring employee shall not be employed in another company / entity belonging to the same management | Anti-rejoining of the same group |
6. The VRS amount does not exceed three months' salary × completed years of service, OR the salary at the time of retirement × balance months of service before normal superannuation -- whichever is lower | Computational cap on the VRS amount itself |
7. The scheme is uniformly applied to all eligible employees | No discrimination among eligible employees |
8. The scheme is in accordance with the guidelines prescribed | Catch-all |
The strict-construction approach Tribunal jurisprudence has consistently held that ALL EIGHT conditions of Rule 2BA must be cumulatively satisfied for the sub-clause (10C) exemption. The most common failure modes are -- the scheme being targeted at a specific group rather than all employees (failing condition 2); the VRS amount exceeding the formula in condition 6; and the rejoining of the same employee through a related-party entity (failing condition 5). Practitioners should verify each condition explicitly before claiming the exemption. |
3. Worked Example -- Public-Sector Bank VRS
Mr. Pravin, 52, accepted his public-sector bank's Voluntary Retirement Scheme in February 2026 after 28 years of service. Last drawn salary (basic plus dearness allowance): ₹1,80,000 per month. VRS package -- ₹35 lakh lump-sum compensation; ₹14 lakh gratuity (separately under section 10(10)); ₹18 lakh commuted pension (separately under section 10(10A)); ₹12 lakh leave encashment (separately under section 10(10AA)).
Component | Exemption Provision | Exempt Amount | Taxable Amount |
|---|---|---|---|
VRS compensation ₹35 lakh | Sub-clause (10C) of section 10 | ₹5 lakh (cap) | ₹30 lakh |
Gratuity ₹14 lakh | Sub-clause (10) of section 10 (PoGA-covered) | Lower of formula = approx ₹14 lakh | Nil |
Commuted pension ₹18 lakh | Sub-clause (10A)(ii)(a) -- gratuity received, so 1/3 exempt | ₹6 lakh | ₹12 lakh |
Leave encashment ₹12 lakh | Sub-clause (10AA)(ii) -- four-limb test | Approx ₹12 lakh (within ₹25 lakh cap) | Nil |
Aggregate exempt | ₹37 lakh | ||
Aggregate taxable | ₹42 lakh | ||
Section 89 relief on the ₹42 lakh -- spread across 28 service years | Form 10E mandatory | Substantial -- typically halves the cliff-edge tax | Per Rule 21A |
The cumulative exempt structure Mr. Pravin's VRS package totals rupees seventy-nine lakh. Of this, approximately rupees thirty-seven lakh is exempt across the four sub-clauses. The remaining rupees forty-two lakh is taxable -- but section 89 relief through Form 10E (RET-06) typically halves the effective tax by spreading the lump sum notionally across the 28 service years. The CA's role at retirement is to optimise this stack -- ensuring each sub-clause's documentation is robust and Form 10E is filed before the Income Tax Return. |
4. The 'Once Per Lifetime' Rule
Sub-clause (10C) of section 10 is a once-per-employee benefit. An employee who claimed the exemption in an earlier year for an earlier VRS cannot claim again in a subsequent VRS at a different employer. The lifetime aggregate is rupees five lakh -- once exhausted, future VRS receipts are fully taxable. This is rare in practice (most employees take VRS only once) but matters for senior-management mobility patterns.
5. The Section 89 Overlay
Sub-clause (10C) and section 89 of the Income-tax Act, 1961 are not mutually exclusive -- the assessee can claim both. The sub-clause (10C) exemption removes the first rupees five lakh from the charge; section 89 then spreads the remaining taxable portion across the service years for relief. Form 10E must be filed before the Income Tax Return; failure denies the section 89 relief (per Mumbai Tribunal Aditya Vikram Birla principle covered in SAL-04). RET-06 covers the section 89 mechanics in detail.
6. Practitioner Documentation Discipline
- Copy of the VRS / VSS scheme document showing the eight Rule 2BA conditions are satisfied.
- Board / shareholder approval of the scheme.
- VRS payment letter / settlement statement.
- Service certificate confirming completed years of service.
- Verification that the employer has not refilled the vacancy (where verifiable).
- Form 10E filing for section 89 relief -- before the Income Tax Return.
- Income Tax Return Schedule S entry; supporting four-component computation in client file.
7. Case Law Reference and Anticipatory Legal Analysis
Legal Framework: VRS exemption and Rule 2BA Clause (10C) of section 10 of the Income-tax Act, 1961 read with Rule 2BA of the Income-tax Rules, 1962 exempts compensation received on voluntary retirement or termination of service under a voluntary retirement scheme (or, for a public sector company, a voluntary separation scheme), up to rupees five lakh. The first proviso requires the scheme to be framed in accordance with the prescribed guidelines, so compliance with Rule 2BA is a condition of the exemption. Once the exemption has been allowed for one assessment year, it is not available for any other year; and if relief under section 89 has been allowed for the receipt, the exemption is not available at all. |
Prospective Interpretation -- The legacy rupees-5-lakh ceiling Two unsettled interpretive issues. (i) The rupees-five-lakh ceiling under sub-clause (10C) has not been raised since insertion (whereas leave encashment was raised to rupees twenty-five lakh by Notification 31/2023 in May 2023, and the gratuity limit now stands at rupees twenty lakh); the parity argument suggests the ceiling is overdue for enhancement. (ii) Treatment of the new-regime overlay -- the clause (10C) exemption continues under the new regime (section 115BAC(2) does not list it among the exemptions withdrawn); but section 89 relief is not available for a voluntary-retirement receipt once the clause (10C) exemption has been claimed for it (proviso to section 89), and the two cannot be combined for the same receipt. |
8. Key Takeaways
- Sub-clause (10C) of section 10 grants up to ₹5 lakh exemption on VRS / VSS compensation.
- Rule 2BA imposes 8 cumulative conditions -- service / age threshold, all-employees scope, headcount reduction, no refill, no rejoining, formula cap, uniform application, guideline compliance.
- Specified employers include public-sector / private companies, statutory bodies, local authorities, co-operative societies, universities, Indian Institutes of Technology, State / Central Government.
- VRS exemption is in addition to gratuity, commuted pension, and leave encashment exemptions -- cumulative stack typical for a senior executive.
- Once-per-employee lifetime cap of ₹5 lakh.
- Section 89 relief through Form 10E applies on the taxable VRS portion -- mandatory pre-Income-Tax-Return filing.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.