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
Case Law Reference: VRS exemption and Rule 2BA Sub-clause (10C) of section 10 of the Income-tax Act, 1961 read with Rule 2BA of the Income-tax Rules, 1962 prescribes the eligibility scheme for Voluntary Retirement Scheme compensation -- the rupees five lakh exemption ceiling, minimum-three-months-notice rule, no-rehiring restriction, and the four-component computation. The Bombay High Court in Commissioner of Income-tax v. State Bank of India (2008) 296 ITR 376 (Bom) and the Income Tax Appellate Tribunal Mumbai in [VERIFY: confirm Tribunal citation on the rule 2BA compliance for banking-sector VRS] held that strict compliance with Rule 2BA is a pre-condition to the exemption; non-compliance with even one limb (e.g., no-rehiring restriction) disqualifies the exemption regardless of the equity of the underlying scheme. [VERIFY: cross-check specific Tribunal citations in the BharatTax case-law database.] |
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 gratuity to rupees twenty lakh by the Finance Act, 2017); the parity argument suggests the ceiling is overdue for enhancement. (ii) Treatment of the new-regime overlay -- sub-clause (10C) exemption continues under the new regime (not in the disallowance schedule), but the section 89 relief which is often more material at HNI VRS receipts (where compensation regularly exceeds rupees five lakh) requires Form 10E filing before the Income Tax Return. The BharatTax case-law database should monitor emerging Tribunal positions on the legacy-ceiling parity and on the section 89 / Form 10E timing principle. [VERIFY: confirm Tribunal decisions emerging on these issues.] |
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.