Rule 20 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 20 of the Income-tax Rules, 2026 lists the nine kinds of employer whose voluntary retirement scheme qualifies under section 19, and the six requirements the scheme itself must satisfy.
Whose scheme qualifies under rule 20
Sub-rule (1): the amount received at the time of voluntary retirement or voluntary separation can be claimed as a deduction for section 19 by an employee of:
- a public sector company;
- any other company;
- an authority established under a Central Act, State Act or Provincial Act;
- a local authority;
- a co-operative society;
- 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;
- an Indian Institute of Technology within clause (g) of section 3 of the Institutes of Technology Act, 1961;
- an institution having importance throughout India or in any State or States, as the Central Government may notify; or
- such other institute of management as the Central Government may notify.
The 1962 parallel is rule 2BA.
The six requirements rule 20 imposes on the scheme
Sub-rule (2): the deduction is allowable only if the scheme of voluntary retirement — or, for a public sector company, the scheme of voluntary separation — is in accordance with the following:
| # | Requirement |
|---|---|
| (i) | The scheme applies to an employee who has completed ten years of service or completed forty years of age |
| (ii) | The scheme applies to all employees (by whatever name called) including workers and executives of the company, authority or co-operative society, excepting directors of a company or of a co-operative society |
| (iii) | The scheme has been drawn to result in overall reduction in the existing strength of the employees |
| (iv) | The vacancy caused 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 does not exceed either A or B, where A = 3 × N × S and B = M × S |
Three of the six requirements in rule 20 test the employer's conduct rather than the retiring employee's entitlement. The scheme must be designed to shrink headcount; the post must not be refilled; and the employee must not resurface in a concern under the same management. A scheme used to churn staff, or an employee re-hired by a sister concern, breaks conditions that have nothing to do with the amount paid.
The monetary ceiling in rule 20
| Symbol | Meaning |
|---|---|
| A | 3 × N × S |
| B | M × S |
| N | Number of completed years of service |
| M | Balance months of service left before the date of retirement on superannuation |
| S | Salary at the time of retirement |
Sub-rule (4): "salary" includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
The two limbs of the ceiling are not expressed on the same unit. A multiplies three times the completed years of past service by salary; B multiplies the balance months of future service by the same salary. For a long-serving employee close to superannuation, B is usually the binding figure; for a younger employee with decades left, A binds. The requirement is that the amount receivable does not exceed either, so the lower of the two is the effective cap.
The public sector separation carve-out
Sub-rule (3): where an amount is received by an employee of a public sector company under that company's scheme of voluntary separation, the requirement in sub-rule (2)(i) shall not apply.
So a public sector voluntary separation scheme need not confine itself to employees with ten years of service or forty years of age. Every other requirement — universality, headcount reduction, no refilling, no re-employment in the same management, and the monetary ceiling — continues to apply.
Worked example
| Facts | Position under rule 20 |
|---|---|
| Employee aged 52, 22 completed years of service, salary Rs 90,000 with DA per the terms of employment; 8 years to superannuation | A = 3 × 22 × 90,000 = Rs 59,40,000; B = 96 × 90,000 = Rs 86,40,000 — the cap is Rs 59,40,000 |
| Same employee with 2 years to superannuation | B = 24 × 90,000 = Rs 21,60,000 — B now binds |
| Salary taken including house rent allowance and car perquisite | Wrong — S excludes all other allowances and perquisites |
| Scheme open only to executives | Fails requirement (ii) |
| Post refilled six months later | Fails requirement (iv) |
| Retiree joins a group company under the same management | Fails requirement (v) |
| Public sector employee aged 34 with 8 years of service under a voluntary separation scheme | Requirement (i) does not apply |
| Director of a co-operative society | Excluded from the scheme |
Compliance checklist
- Confirm the employer is within one of the nine categories.
- Check the scheme covers employees with ten years of service or forty years of age, unless the public sector separation carve-out applies.
- Confirm the scheme is open to all employees, directors apart.
- Evidence that it is drawn to reduce overall strength.
- Commit not to refill the vacancy.
- Obtain an undertaking against re-employment in the same management.
- Compute both A and B and cap the payment at the lower.
- Use salary plus DA only where the terms so provide, excluding other allowances and perquisites.
- Keep the scheme document, the headcount evidence and the computation together.
Common mistakes
- Including allowances and perquisites in S.
- Computing only A and ignoring the balance-months limb.
- Restricting the scheme to a grade or department.
- Refilling the post after the payment.
- Applying the service or age condition to a public sector voluntary separation scheme.