The Hindu Business Line : VRS payments and tax issues

Amount received towards voluntary retirement is eligible for exemption under Section 10(10C) if the scheme of voluntary retirement satisfies the conditions in rule 2BA of the I-T Rules.

V. K. Subramani

According to recent report of International Labour Organisation (ILO) around 20 million jobs would disappear by the end of 2009. Mumbai based Piramal Health Care in the second quarter ended September 2008 is reported to have made payment of Rs 9.5 crore towards VRS programmes of its overseas subsidiaries (Business Line, October 23, 2008).

The recent retrenchment move in the aviation sector, notwithstanding its reversal later for various reasons, must caution both employers and employees in sensitive sectors prone to job cuts — to think of the tax implications of lumpsum payment/receipt and its tax effect.

For the employer, pruning the staff size is to economise or optimise the cost of operation and the golden handshake is meant to block the recurring expenses towards human resources. For the employees, it is time to be alert to look for alternative sources of employment/occupation based on their background and other factors such as age, experience and qualification. Also, the parting gift from the employer to what extent would go to the coffers of the Government by way of tax and how much could be saved requires proper planning.

For the employer

In the case of the employer he may devise a voluntary retirement scheme in accordance with rule 2BA of the Income-tax Rules to enable the employees to claim exemption of Rs 5 lakh as per Section 10(10C) of the Act.

Whether the employer devises a voluntary retirement scheme in accordance with rule 2BA or not, the expenditure incurred towards compensation is deductible in five equal annual instalments as per Section 35 DDA. The cash flow will not be matched by the allowance for tax purposes. Technically, a timing difference as per Accounting Standard 22 would arise in respect of such payment.

Compensation paid under Section 25 FF of the Industrial Disputes Act, 1947 is not eligible for deduction as business expenditure in the hands of employer (CIT vs Gemini Cashew Sales Corporation — 1967 65 ITR 643 SC). However, if the compensation is paid as per Section 25 F of the Industrial Disputes Act it is allowable as business expenditure (CIT vs J. C. Budharaj & Co — 1993 204 ITR 656 Orissa).

Compensation paid by closing one line of business and carrying on other businesses would enable the employer to claim the compensation paid as business expenditure as held in CIT vs Margarine & Refined Oils Co Ltd (2006 154 Taxman 95 Karnataka).

For employees

Amount received towards voluntary retirement is eligible for exemption under Section 10(10C) if the scheme of voluntary retirement satisfies the conditions prescribed in rule 2BA of the Income-tax Rules. Even where the retirement scheme devised by the employer does not satisfy rule 2BA, exemption in the hands of employees were considered liberally in Anant Kumar Agarwal vs ITO (2008 113 ITD 1 Lucknow TM); and Vaishali A. Shelar vs Assistant CIT (2008 113 ITD 1 Mumbai).

An employee receiving voluntary retirement compensation is eligible to claim exemption up to Rs 5 lakh under Section 10(10C) and also relief under Section 89 by spreading over such compensation as held in CIT vs G. V. Venugopal (2005 193 CTR Madras 661).

Excess of compensation above the exemption limit is to be spread equally in three previous years preceding the year of receipt, for computing the relief under Section 89.

Amount received by way of compensation on resignation is also eligible for relief under Section 89 as held in CIT vs J. Visalakshi (1994 206 ITR 531 Madras).

At the time of voluntary retirement or resignation, non-government employees may receive further sums which are eligible for exemption, such as:

the entire amount received from a recognised provident fund, being own contribution and employer’s contribution, is exempt in view of Section 10(11);

amount received towards gratuity covered by the Gratuity Act, 1972 is exempt up to Rs 3.50 lakh; and

encashment of earned leave is eligible for exemption up to Rs 3 lakh subject to certain conditions contained in Section 10(10AA).

(The author is an Erode-based chartered accountant.)

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