Retirement of Salaried Taxpayers & Exemption / Deduction/ Relief against Compensation
VRS- A Complete Guide for Tax Planning
Change in the working pattern and technology has resulted in lot many retirements & retrenchment. It is backed by handsome compensation as well. It may so happen that a salaried taxpayers may receive VRS more than once in his lifetime. However, it may be carefully noted that Income Tax Act offers tax benefit only once. Retirement could be Voluntary or compulsory. VRS (Voluntary Retirement Scheme) is an offer used by the employer for encouraging employee to leave to reduce major operating expense in form of salary. There is no such choice in Compulsory retirement.
Legally speaking, VRS normally form the part of the meaning of “PROFIT IN LIEU OF SALARY” u/s 17(3) of the Income Tax Act, 1961 which reads as under:
“Profit in lieu of salary” includes—
the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto.
In short, VRS received is taxable in the hands of employee under the head ‘Income from Salary’ as profit in lieu of salary is taxable u/s 17.
There are two provisions which offer scope for tax planning in such situations:
- Exemption U/s- 10(10C)
- 2. Relief U/s- 89
Let us know more about it:
Section 10(10C):
Section 10 provides all income which will be treated exempt income and will not be forming the part of the total income.
It provides that any amount received or receivable by an employee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement of
(i) a public sector company; or
(ii) any other company; or
(iii) an authority established under a Central, State or Provincial Act; or
(iv) a local authority; or
(v) a co-operative society; or
(vi) 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 (3 of 1956); or
(vii) an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961); or
(viia) any State Government; or
(viib) the Central Government; or
(viic) an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette, specify in this behalf; or
(viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf, is exempt to the lowest of the following amount:
a) 5.00 lakhs.
- b) Amount equivalent to three months’ salary for each completed year of service.
c) Amount of salary at the time of retirement for the balance period of months of service left before retirement.
Section 89:
Section 89 provides that where an assessee is in receipt of a sum under the provisions of clause (3) of section 17, a profit in lieu of salary, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, shall take such relief as may be prescribed under rule 21A of Income Tax Rules:
The main essence behind the relief u/s 89 is to save the huge amount of tax incurrence suddenly in a particular year due to receipt of a large sum of money in the form of VRS.
The relief under Rule 21A is based on the calculation of average rate of tax on such amount of compensation, being bifurcated into the three previous years immediately preceding the previous year in which the VRS is received in order to determine the tax inclination if the entire amount is taxed at once or if it is taxed by part into the various previous years.
The Computation of relief can be done by following sequential steps as under:
- Compute the Tax payable during the previous year in which the compensation is received.
- Compute the rate of tax on total income during the previous year in which the compensation is received.
- Compute the tax on total income by adding the 1/3rd of VRS amount received in each of the three preceding previous years immediately preceding the year in which the VRS is received.
- Compute the rate of tax for each preceding three years separately.
- Compute the average of rate of tax for three preceding years.
- Amount of relief = VRS amount X [Step 2 – Step 5]
It may be noted that under the provisions of Income Tax Act – 1961 both the sections are mutually exclusive & salaried taxpayer can claim either exemption u/s 10(10C) or relief u/s 89 whichever is most beneficial to him.
There is one more bar. If exemption or relief is claimed in any assessment year, it cannot be claimed again in any other assessment year. Exemption/Relief in relation to VRS is once in a life time offer.
For ease of reference all the relevant part of the Act & Rules are produced hereunder for easy reference and computation:
SECTION 10(10C)
(10C) any amount received or receivable by an employee of—
(i) a public sector company ; or
(ii) any other company ; or
(iii) an authority established under a Central, State or Provincial Act ; or
(iv) a local authority ; or
(v) a co-operative society ; or
(vi) 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 (3 of 1956) ; or
(vii) an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961) ; or
(viia) any State Government; or
(viib) the Central Government; or
(viic) an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette, specify in this behalf; or
(viii) such institute of management as the Central Government may, by notification in the Official Gazette, specify in this behalf,
on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company referred to in sub-clause (i), a scheme of voluntary separation, to the extent such amount does not exceed five lakh rupees :
Provided that the schemes of the said companies or authorities or societies or Universities or the Institutes referred to in sub-clauses (vii) and (viii), as the case may be, governing the payment of such amount are framed in accordance with such guidelines (including inter alia criteria of economic viability) as may be prescribed:
Provided further that where exemption has been allowed to an employee under this clause for any assessment year, no exemption thereunder shall be allowed to him in relation to any other assessment year :
Provided also that where any relief has been allowed to an assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under this clause shall be allowed to him in relation to such, or any other, assessment year;
SECTION 89:
B.—Relief for income-tax
Relief when salary, etc., is paid in arrears or in advance.
- Where an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance or is in receipt, in any one financial year, of salary for more than twelve months or a payment which under the provisions of clause (3) of section 17is a profit in lieu of salary, or is in receipt of a sum in the nature of family pension as defined in the Explanation to clause (iia) of section 57, being paid in arrears, due to which his total income is assessed at a rate higher than that at which it would otherwise have been assessed, the Assessing Officer shall, on an application made to him in this behalf, grant such relief as may be prescribed:
Provided that no such relief shall be granted in respect of any amount received or receivable by an assessee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company referred to in sub-clause (i) of clause (10C) of section 10, a scheme of voluntary separation, if an exemption in respect of any amount received or receivable on such voluntary retirement or termination of his service or voluntary separation has been claimed by the assessee under clause (10C) of section 10 in respect of such, or any other, assessment year.
RULE 21A
Relief when salary is paid in arrears or in advance, etc.
21A. [(1) Where, by reason of any portion of an assessee’s salary being paid in arrears or in advance or, by reason of any portion of family pension received by an assessee being paid in arrears or, by reason of his having received in any one financial year salary for more than twelve months or a payment which under the provisions of clause (3) of section 17 is a profit in lieu of salary, his income is assessed at a rate higher than that at which it would otherwise have been assessed, the relief to be granted under sub-section (1) of section 89 shall be—
| (a) | where any portion of the assessee’s salary is received in arrears or in advance or, any portion of family pension is received by an assessee in arrears, in accordance with the provisions of sub-rule (2); | |
| (b) | where the payment is in the nature of gratuity in respect of past services of the assessee extending over a period of not less than five years, in accordance with the provisions of sub-rule (3); | |
| (c) | where the payment is in the nature of compensation received by the assessee from his employer or former employer at or in connection with the termination of his employment after continuous service for not less than three years and where the unexpired portion of his term of employment is also not less than three years, in accordance with the provisions of sub-rule (4); | |
| (d) | where the payment is in commutation of pension, in accordance with the provisions of sub-rule (5); and | |
| (e) | where the payment is not in the nature of salary paid in arrears or in advance or gratuity in respect of past services or compensation received at or in connection with the termination of employment or in commutation of pension, in accordance with the provisions of sub-rule (6). |
(2)(a) In a case referred to in clause (a) of sub-rule (1), the tax payable by the assessee on his total income of the previous year in which the salary is received in arrears or in advance or, in which the family pension is received in arrears (such salary or family pension being hereafter in this sub-rule referred to respectively as the additional salary or additional family pension, as the case may be, and such previous year being hereafter in this sub-rule referred to as the relevant previous year) shall be reduced by the amount, if any, by which the tax on the additional salary or additional family pension, calculated in the manner specified in clause (b), exceeds the tax or the aggregate tax on the additional salary or additional family pension, calculated in the manner specified in clause (c) or clause (d), as the case may be.
(b) Tax shall be calculated on the total income of the relevant previous year as reduced by the additional salary or additional family pension, as the case may be, as if the total income so reduced were the total income of the assessee, and the amount by which the tax so calculated falls short of the tax on the total income before such reduction shall, for the purposes of clause (a), be taken to be the tax on the additional salary or additional family pension, under this clause.
(c) Where the additional salary or additional family pension, as the case may be, relates to only one previous year, tax shall be calculated on the total income of the said previous year as increased by the additional salary or additional family pension, as if the total income so increased were the total income of the assessee, and the amount by which the tax so calculated exceeds the tax payable by the assessee in respect of the total income of the said previous year shall, for the purposes of clause (a), be taken to be the tax on the additional salary or additional family pension, under this clause.
(d) Where the additional salary or additional family pension, as the case may be, relates to more than one previous year,—
| (i) | the previous years to which the additional salary or additional family pension relates and the amount relating to each such previous year shall first be ascertained; | |
| (ii) | tax shall, then, be calculated on the total income of each such previous year as increased by the amount relating to such previous year ascertained under sub-clause (i); as if the total income so increased were the total income of that previous year, and the amount by which the aggregate amount of tax in respect of the aforesaid previous years as calculated under sub-clause (ii) exceeds the aggregate amount of tax payable by the assessee in respect of the total income of the said previous years shall, for the purposes of clause (a), be taken to be the aggregate tax on the additional salary or additional family pension, under this clause.] |
(3) (a) In a case referred to in clause (b) of sub-rule (1), the tax payable by the assessee on his total income of the previous year in which the payment by way of gratuity is received (such previous year being hereafter in this sub-rule referred to as the relevant previous year) shall be reduced by the amount, if any, by which the tax on the amount of the gratuity included in the total income of the relevant previous year, calculated at the average rate of tax applicable to such total income, exceeds the tax on the amount of such gratuity, calculated at the rate of tax determined under clause (b) or, as the case may be, clause (c).
(b) Where the payment by way of gratuity is made in respect of past services of the assessee extending over a period of not less than five years but less than fifteen years,—
| (i) | the total income of the assessee in respect of each of the two previous years immediately preceding the relevant previous year shall be increased by an amount equal to one-half of the amount of the gratuity included in the total income of the relevant previous year, and the average rate of tax for each of the said two previous years shall be calculated as if the total income so increased were the total income of that previous year; and | |
| (ii) | the average of the average rates of tax for the two previous years immediately preceding the relevant previous year, calculated in accordance with sub-clause (i), shall, for the purposes of clause (a), be the rate of tax determined under this clause. |
(c) Where the payment by way of gratuity is made in respect of past services of the assessee extending over a period of not less than fifteen years,—
| (i) | the total income of the assessee in respect of each of the three previous years immediately preceding the relevant previous year shall be increased by an amount equal to one-third of the amount of the gratuity included in the total income of the relevant previous year, and the average rate of tax for each of the said three previous years shall be calculated as if the total income so increased were the total income of that previous year; and | |
| (ii) | the average of the average rates of tax for the three previous years immediately preceding the relevant previous year, calculated in accordance with sub-clause (i), shall, for the purposes of clause (a), be the rate of tax determined under this clause. |
(4) (a) In a case referred to in clause (c) of sub-rule (1), the tax payable by the assessee on his total income of the previous year in which the payment by way of compensation is received (such previous year being hereafter in this sub-rule referred to as the relevant previous year) shall be reduced by the amount, if any, by which the tax on the amount of the compensation included in the total income of the relevant previous year, calculated at the average rate of tax applicable to such total income, exceeds the tax on the amount of such compensation, calculated at the rate of tax determined under clause (b).
(b) The total income of the assessee in respect of each of the three previous years immediately preceding the relevant previous year shall be increased by an amount equal to one-third of the amount of the compensation included in the total income of the relevant previous year, and the average rate of tax for each of the said three previous years shall be calculated as if the total income so increased were the total income of that previous year; and the average of the average rates of tax so calculated for the three previous years shall, for the purposes of clause (a), be the rate of tax determined under this clause.
(5) (a) In a case referred to in clause (d) of sub-rule (1), the tax payable by the assessee on his total income of the previous year in which the payment in commutation of pension is received (such previous year being hereafter in this sub-rule referred to as the relevant previous year) shall be reduced by the amount, if any, by which the tax on the payment in commutation of pension included in the total income of the relevant previous year, calculated at the average rate of tax applicable to such total income, exceeds the tax on the amount of such payment, calculated at the rate of tax determined under clause (b).
(b) The total income of the assessee in respect of each of the three previous years immediately preceding the relevant previous year shall be increased by an amount equal to one-third of the amount of payment in commutation of pension included in the total income of the relevant previous year, and the average rate of tax for each of the said three previous years shall be calculated as if the total income so increased were the total income of that previous year; and the average of the average rates of tax so calculated for the three previous years shall, for the purposes of clause (a), be the rate of tax determined under this clause.
(6) In a case referred to in clause (e) of sub-rule (1), the Board may, having regard to the circumstances of the case, allow such relief as it deems fit.]
RULE 21AA
Furnishing of particulars for claiming relief under section 89(1).
21AA. Where the assessee, being a Government servant or an employee in a [company, co-operative society, local authority, university, institution, association or body], is entitled to relief under sub-section (1) of section 89, he may furnish to the person responsible for making the payment referred to in sub-section (1) of section 192, the particulars specified in Form No. 10E.]
FORM NO. 10E:
[See rule 21AA]
Form for furnishing particulars of income under section 192(2A) for the year ending 31st
March,________ for claiming relief under section 89(1) by a Government servant or an
employee in a company, co-operative society, local authority, university, institution, association
or body
| 1. Name and address of the employee | : | ||||||
| 2. Permanent Account Number or Aadhaar Number | : | ||||||
| 3. Residential status | : | ||||||
| Particulars of income referred to in rule 21A of the Income tax rules, 1962, during the previous year relevant to assessment year . | |||||||
Rs |
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| 1. a. Salary received in arrears or in advance in accordance with
the provisions of sub-rule (2) of rule 21A
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| b. Payment in the nature of gratuity in respect of past services, extending over a period of not less than 5 years in accordance with the provisions of sub-rule (3) of rule 21A
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| c. Payment in the nature of compensation from the employer or former employer at or in connection with termination of employment after continuous service of not less than 3 years or where the unexpired portion of term of employment is also not less than 3 years in accordance with the provisions of sub-rule(4) of rule 21A
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| d. Payment in commutation of pension in accordance with the provisions of sub-rule (5) of rule 21A
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| 2. Detailed particulars of payments referred to above may be given in Annexure I, II,IIA, III or IV, as the case may be.
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Signature of the employee |
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| Verification | |||||||
| I, , do hereby declare that what is stated above is true to the best of my knowledge and belief.
Verified today, the day of . |
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| Place: | |||||||
| Date: |
Signature of the employee |
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ANNEXURE I (See item 2 of Form No. 10E)
ARREARS OR ADVANCE SALARY
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| 1 | Total income (excluding salary received in arrears or advance) | ||||||
| 2 | Salary received in arrears or advance | ||||||
| 3 | Total income (as increased by salary received in arrears or advance) [Add item 1 and item 2]
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| 4 | Tax on total income (as per item 3) | ||||||
| 5 | Tax on total income (as per item 1) | ||||||
| 6 | Tax on salary received in arrears or advance
[Difference of item 4 and item 5] |
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| 7 | Tax computed in accordance with Table “A”
[Brought from column 7 of Table “A”] |
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| 8 | Relief under section 89(1) [Indicate the difference between the amounts mentioned against item 6 an 7] | ||||||
TABLE “A”[See item 7 of Annexure I] |
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| Previous year(s) | Total income of the relevant previous year (Rs.) | Salary received in arrears or advance relating to the relavant previous year as mentioned in column (1) (Rs) | Total income (as increased by salary received in arrears or advance) of the relevant previous year mentioned in column 1 [Add columns (2) and (3) ](Rs.) | Tax on total income [as per column (2)] (Rs.) | Tax on total income [as per column (4)] (Rs.) | Difference in tax [Amount under column (6) minus amount under column (5)] (Rs.) |
| 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Note: In this Table, details of salary received in arrears or advance relating to different previous years may be furnished.
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ANNEXURE II [See item 2 of Form No. 10E]
GRATUITY Past services extending over a period of 5 years or more but less than 15 years
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| 1 | Gratuity received | ||
| 2 | Total Income (including gratuity) | ||
| 3 | Tax on total income mentioned against item 2 | ||
| 4 | Average rate of tax applicable on total income [Divide amount mentioned against item 3 by amount mentioned against item 2] | ||
| 5 | Tax payable on gratuity by applying the average rate of tax [Multiply average rate of tax mentioned against item 4 with amount of gratuity mentioned against item 1] | ||
| 6 | Total income of two previous years immediately preceding the previous year in which gratuity is received | i | |
| ii | |||
| 7 | Add one-half of the gratuity mentioned against item 1 in the total income of each of the two preceding previous years mentioned against item 6 | i | |
| ii | |||
| 8 | Tax on total income of each of the preceding previous years mentioned against item 7 | i | |
| ii | |||
| 9 | Average rate of tax on the total income of each of the two preceding previous years as increased by ½ of gratuity calculated for that year as mentioned against item 7. [Divide the amount mentioned against items 8(i) and 8(ii) by the amount mentioned against items 7(i) and 7(ii) respectively] | i | |
| ii | |||
| 10 | Average of average rates of tax mentioned against item 9 [Add the averages of tax mentioned against items 9(i) and (ii) and divide it by 2] | ||
| 11 | Tax payable on gratuity by applying the average of average rates of tax [Multiply the average against item 10 by the amount of gratuity mentioned against item 1] | ||
| 12 | Relief under section 89(1) [Indicate the difference between the amounts mentioned against items 11 and 5] | ||
|
ANNEXURE IIA [See item 2 of Form No. 10E]
GRATUITY Past services extending over a period of 15 years or more |
|||
| 1 | Gratuity received | ||
| 2 | Total Income (including gratuity) | ||
| 3 | Tax on total income mentioned against item 2 | ||
| 4 | Average rate of tax applicable on total income [Divide amount mentioned against item 3 by amount mentioned against item 2] | ||
| 5 | Tax payable on gratuity by applying the average rate of tax [Multiply average rate of tax mentioned against item 4 with amount of gratuity mentioned against item 1] | ||
| 6 | Total income of three previous years immediately preceding the previous year in which gratuity is received | i | |
| ii | |||
| iii | |||
| 7 | Add one-third of the gratuity mentioned against item 1 in the total income of each of the three preceding previous years mentioned against item 6 | i | |
| ii | |||
| iii | |||
| 8 | Tax on total income of each of the preceding previous years mentioned against item 7 | i | |
| ii | |||
| iii | |||
| 9 | Average rate of tax on the total income of each of the three preceding previous years as increased by 1/3 of gratuity calculated for that year as mentioned against item 7 [Divide the amount mentioned against items 8(i), 8(ii) and 8(iii) by the amount mentioned against items 7(i),7(ii) and 7(iii), respectively] | i | |
| ii | |||
| iii | |||
| 10 | Average of average rates of tax mentioned against item 9 [Add the averages of tax mentioned against items 9(i) and (iii) and divide it by 3] | ||
| 11 | Tax payable on gratuity by applying the average of average rates of tax [Multiply the average against item 10 by the amount of gratuity mentioned against item 1] | ||
| 12 | Relief under section 89(1) ) [Indicate the difference between the amounts mentioned against items 11 and 5] | ||
|
ANNEXURE III
Compensation on termination of employment Condition: After continuous service of three years and where unexpired portion of term of employment is also not less than three years |
|||
| 1 | Compensation received | ||
| 2 | Total income (including compensation) | ||
| 3 | Tax on total income mentioned against item 2 | ||
| 4 | Average rate of tax applicable on total income [Divide amount mentioned against item 3 by amount mentioned against item 2] | ||
| 5 | Tax payable on compensation by applying the average rate of tax [Multiply average rate of tax mentioned against item 4 with amount of compensation mentioned against item 1] | ||
| 6 | Total income of three previous years immediately preceding the previous year in which compensation is received | i | |
| ii | |||
| iii | |||
| 7 | Add one-third of the compensation mentioned against item 1 in the total income of each of the three preceding previous years mentioned against item 6 | i | |
| ii | |||
| iii | |||
| 8 | Tax on total income of each of the preceding previous years mentioned against item 7 | i | |
| ii | |||
| iii | |||
| 9 | Average rate of tax on the total income of each of the three preceding previous years as increased by 1/3 of compensation calculated for that year as mentioned against item 7 [Divide the amount mentioned against items 8(i), 8(ii) and 8(iii) by the amount mentioned against items 7(i),7(ii) and 7(iii), respectively] | i | |
| ii | |||
| iii | |||
| 10 | Average of average rates of tax mentioned against item 9 [Divide by three, the total of averages of tax mentioned against items 9(i) to (iii)] | ||
| 11 | Tax payable on compensation by applying the average of average rates of tax [Multiply the average against item 10 by the amount of compensation mentioned against item 1] | ||
| 12 | Relief under section 89(1) ) [Indicate the difference between the amounts mentioned against items 11 and 5] | ||
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ANNEXURE IV
COMMUTATION OF PENSION
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| 1 | Amount in commutation of pension received | ||
| 2 | Total Income (including amount in commutation of pension) | ||
| 3 | Tax on total income mentioned against item 2 | ||
| 4 | Average rate of tax applicable on total income [Divide amount mentioned against item 3 by amount mentioned against item 2] | ||
| 5 | Tax payable on amount in commutation of pension by applying the average rate of tax [Multiply average rate of tax mentioned against item 4 with amount in commutation of pension mentioned against item 1] | ||
| 6 | Total income of each of the three previous years immediately preceding the previous year in which Amount in commutation of pension is received | i | |
| ii | |||
| iii | |||
| 7 | Add one-third of the amount in commutation of pension mentioned against item 1 in the total income of each of the three preceding previous years mentioned against item 6 | i | |
| ii | |||
| iii | |||
| 8 | Tax on total income of each of the preceding previous years mentioned against item 7 | i | |
| ii | |||
| iii | |||
| 9 | Average rate of tax on the total income of each of the three preceding previous years as increased by 1/3 of the amount in commutation of pension calculated for that year as mentioned against item 7 [Divide the amount mentioned against items 8(i), 8(ii) and 8(iii) by the amount mentioned against items 7(i),7(ii) and 7(iii), respectively] | i | |
| ii | |||
| iii | |||
| 10 | Average of average rates of tax mentioned against item 9 [Divide by three, the total of averages of tax mentioned against items 9(i) to (iii)] | ||
| 11 | Tax payable on amount in commutation of pension by applying the average of average rates of tax [Multiply the average against item 10 by the amount in commutation of pension mentioned against item 1] | ||
| 12 | Relief under section 89(1) ) [Indicate the difference between the amounts mentioned against items 11 and 5] | ||
