VRS explained: this guide covers what VRS 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.
Key Highlights
- VRS compensation: exempt up to Rs 5 lakh under Schedule II of ITA 2025
- Applies to employees of: any company or authority (public sector, private sector, PSU)
- Eligibility: Employee must be 40 years old OR completed 10 years of service
- VRS scheme must be in accordance with CBDT guidelines
- Excess over Rs 5 lakh: taxable as salary income at slab rate
- No simultaneous claim: if VRS exemption is claimed, Section 157 rebate still applies
1. What is VRS?
Voluntary Retirement Scheme (VRS) is an early retirement package offered by employers to reduce workforce numbers. An employee voluntarily retires before reaching the mandatory retirement age in exchange for a lump sum compensation. VRS is sometimes called the "golden handshake." Both public sector and private sector organisations offer VRS packages.
2. VRS Exemption Under Schedule II
Under Schedule II of the Income Tax Act, 2025, VRS compensation is exempt from tax subject to the following conditions:
- The employee must be aged 40 years or above, OR must have completed 10 years of service
- The amount must be received under a VRS scheme that follows CBDT guidelines
- The VRS scheme must not apply to a director of a company or an authority
- The exemption is limited to Rs 5,00,000 per employee in a lifetime
- If the employee has already claimed VRS exemption from a previous employer, the balance available is reduced accordingly (lifetime limit)
3. Exemption Calculation
Under CBDT guidelines, the VRS amount must not exceed the lower of:
- Three months salary (Basic + DA) for each completed year of service
- Remaining months salary from VRS date to normal retirement date
The tax exemption is the lower of the amount computed above or Rs 5 lakh — the excess is fully taxable as salary.
4. VRS Example
Illustrative only. Suresh takes VRS at age 52, having completed 28 years of service. Last drawn monthly Basic + DA = Rs 60,000. Normal retirement at 60 — 8 years remaining (96 months). VRS compensation received = Rs 20 lakh.
- 3 months × Rs 60,000 × 28 years = Rs 50,40,000
- 96 months × Rs 60,000 = Rs 57,60,000
- Lower of above: Rs 50,40,000 — so Rs 20 lakh is within the permitted amount
- Exemption = lower of Rs 20L or Rs 5L = Rs 5 lakh
- Taxable VRS = Rs 20L − Rs 5L = Rs 15 lakh (taxed at slab rates)
5. VRS vs Retrenchment: Difference
| Feature | VRS | Retrenchment Compensation |
|---|---|---|
| Nature | Voluntary early retirement | Involuntary termination |
| Tax exemption | Rs 5 lakh (Schedule II) | Rs 5 lakh or 15 days pay per year (Industrial Disputes Act) |
| Employee choice | Employee opts in | Employer-initiated |
6. Why TaxClue
VRS taxation requires verifying eligibility, calculating exemption, and reporting excess compensation correctly in the ITR. TaxClue guides employees through VRS tax computation and files the ITR with maximum exemptions claimed. Contact us for VRS tax advisory under ITA 2025.