What is a Voluntary Retirement Scheme (VRS)?
- A program that allows employees to opt for early retirement before the standard retirement age.
- Benefits employees seeking early retirement for personal reasons.
- Helps companies reduce workforce and operational costs while enhancing productivity.
- Essentially a mutual separation agreement between the employer and employee.
- Employees receive a lump sum compensation or “golden handshake” in exchange for leaving early.
- Common in public sector undertakings (PSUs), government departments, and private companies (especially during restructuring, mergers, or cost-cutting).
- The purpose is not forced termination — it is voluntary, but the decision to introduce VRS rests with the employer.
Objectives of VRS
- Reduce workforce to cut salary expenses.
- Restructure organizations for better efficiency.
- Introduce new technology that may require fewer employees.
- Address surplus staff issues in PSUs and private companies.
- Provide an attractive exit option for employees wishing to leave before retirement.
Who Can Opt for VRS?
- Eligibility varies by organization, but general norms in India include:
- Minimum age: 40 years (sometimes higher, depending on rules).
- Minimum service: 10 years of continuous service.
- Applies to permanent employees (not contractual/temporary staff).
- Covers both workmen and executives in PSUs, government bodies, and private companies (as per policy).
- Directors are not eligible.
- Government approval is required before implementing VRS.
- Tax rules governed by Section 2BA of the Income Tax Act.
- Post-VRS restriction: Employees cannot join another organization managed by the same company after opting for VRS.
Advantages for Employees
- Lump sum financial cushion.
- Option to retire early and pursue business, freelance work, or other careers.
- Exit from stressful jobs or relocate.
- Still entitled to gratuity, provident fund, and pension (if applicable).
Advantages for Employers
- Reduce salary burden quickly.
- Avoids layoffs, which may cause unrest and legal challenges.
- Enables smooth restructuring without forced terminations.
Taxation Benefits
- Under Section 10(10C) of the Income Tax Act:
- Compensation under VRS is exempt up to ₹5 lakh (once in a lifetime).
- Scheme must comply with prescribed guidelines.
- Any amount above ₹5 lakh is taxable as per the applicable income tax slab.
How is VRS Compensation Calculated?
Example Calculation
Employee Name: Mr. X
Age: 50 years
Years of Service Completed: 20 years
Retirement Age in Organization: 60 years
Basic Pay + DA (per month): ₹50,000
VRS Rule:
- Payout = Lower of:
- 3 months’ salary × Completed Years of Service
- 3 months’ salary = ₹50,000 × 3 = ₹1,50,000
- For 20 years = ₹1,50,000 × 20 = ₹30,00,000
- Monthly salary × Remaining months of service
- Remaining years = 60 − 50 = 10 years
- Remaining months = 10 × 12 = 120 months
- Total = ₹50,000 × 120 = ₹60,00,000
Lower amount = ₹30,00,000
- Final VRS Compensation = ₹30 lakh
- Tax Benefit: Up to ₹5 lakh exempt under Section 10(10C) (once in a lifetime, if scheme meets guidelines).
Summary
- VRS is like an early retirement exit door that benefits both sides when used wisely.
- Employees get a decent payout and benefits, while employers reduce manpower smoothly without layoffs.
