Archive · 27 Aug 2026
VRS Severance: How Much Compensation Is Tax-Free Under New Rules
A worker who leaves a job through a qualifying Voluntary Retirement Scheme may receive a tax break.
The maximum tax-free amount is Rs 5 lakh.
If the payment is higher, the extra amount is usually taxed as salary.
The worker generally must have worked for 10 years or be at least 40 years old.
The employer’s retirement plan must also meet several government conditions.
The tax-free limit applies to the total payment, even if the money arrives in installments.
It can generally be used only once in a person’s lifetime.
Other benefits, such as gratuity and provident fund payments, have separate tax rules.
Workers should check their Form 16 and tax records before filing their return.
VRS compensation received by March 31, 2026, is governed by Section 10(10C), while amounts received from April 1, 2026, fall under Section 19 of the Income-tax Act, 2025.
The tax exemption is capped at Rs 5 lakh in total, and any excess is taxable as salary.
Eligibility generally requires 10 years of service or reaching age 40, subject to an exception for certain public-sector voluntary separation schemes.
The employer’s scheme must reduce staff strength, leave vacancies unfilled, and meet other Rule 2BA conditions.
Taxpayers should report the exempt amount separately, include only the taxable balance in salary income, and avoid claiming both the exemption and Section 89 relief on the same amount.
- Who
- Eligible employees of specified employers, including companies, public-sector companies, local authorities, co-operative societies, universities, IITs, notified management institutes, and Central or State Governments.
- What
- Tax treatment of compensation received under a qualifying Voluntary Retirement Scheme or public-sector voluntary separation scheme.
- When
- Compensation received on or before March 31, 2026, is governed by Section 10(10C); compensation received on or after April 1, 2026, is governed by Section 19 of the Income-tax Act, 2025.
- Where
- The rules apply when reporting the compensation in the taxpayer’s income-tax return.
- Why
- To determine the tax-free portion of the severance payment and calculate the employee’s post-tax payout.
- Maximum exemption
- Up to Rs 5 lakh of qualifying VRS compensation.
- Tax treatment of excess
- Any amount above Rs 5 lakh is taxable as salary.
- Lifetime limit
- The exemption can generally be claimed only once in a lifetime.
- Eligibility threshold
- The employee must generally have completed 10 years of service or reached 40 years of age.
- Payment method
- The Rs 5 lakh ceiling applies to the aggregate compensation, whether paid at once or in installments.
- Other retirement benefits
- Gratuity, leave encashment, and provident fund benefits are governed separately under their respective exemption rules.
- Filing treatment
- The exempt portion should be reported under the exempt-income or allowances field, while only the taxable balance should be included in salary income.