With the economy slowing down, more companies may come up with similar schemes for their employees. If you are someone who is likely to or is facing such a situation, it may be difficult to choose between opting for VRS and continuing with a job that may not offer certainty. Here are a few things you should know about VRS before you make a decision.
What is VRS?
Under VRS, business organizations can offer their employees the option of taking voluntary retirement from services before the actual date of retirement. “VRS, as the name suggests, is a voluntary and amicable separation of employees, and those who opt for it usually get a one-time lump sum compensation," said Gopal Bohra, partner, N.A Shah Associates LLP, a Mumbai-based tax accounting firm.
Remember that it’s a choice, so whether you opt for the scheme or not is entirely up to you. It’s not a layoff, where you pretty much don’t have an option but to leave.
Why is VRS offered?
Usually, for companies, VRS is a cost-cutting measure, but there are other reasons too. For instance, companies may offer the scheme due to recession in the business, or due to a merger with or acquisition of another organization, or due to a join venture with foreign collaborations.
“A company may use this technique to trim the excess workforce employed and to reduce overall long-term costs," said Archit Gupta, CEO, Cleartax.com, an online tax filing portal.
What’s the tax implication?
“Though there is no limit prescribed under any law for compensation under VRS, companies usually compute the amount of compensation based on the past employment period and the remaining service period," said Bohra.
However, only a part of the compensation is tax-exempt, that too if the scheme fulfils certain conditions. Under Section 10 (10C) of the Income-tax Act, 1961, compensation up to ₹5 lakh under VRS is exempt from tax. The exemption is available if the scheme is in compliance with the guidelines issued in Rule 2BA of the Income Tax Rules. If the scheme does not meet the conditions, then the entire amount is taxable in the hands of the employee under the head “income from salary".
The conditions for this ₹5 lakh exemption, according to the Income-tax Act are: 1) Any employee who has completed 10 years of service in an organization or is above 40 years of age can apply for VRS. 2) The vacancy created by such retirements is not filled up by the companies. 3) The retiring employee shall not be employed at another company belonging to the same management. 4) The scheme applies to all the employees, including workers and executives of the company, except the directors of the company. 5) The VRS has been drawn to result in an overall reduction in the existing strength of the employees. 6) The amount of compensation shall not exceed either of the following: the amount receivable on account of voluntary retirement (or voluntary separation) of the employee does not exceed the amount equivalent to (three months’) salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement or superannuation. Remember that the last drawn salary will be considered while calculating the amount of payment. Salary includes basic pay, dearness allowance (if it forms part of the retirement benefits) and percentage-wise fixed commission on turnover.
Remember that conditions under rule 2BA do not apply to public sector employees. Additionally, an employee who has claimed exemption under Section 10 (10C) of up to ₹5 lakh in an assessment year, will not be allowed to claim it in any other assessment year.
While you can avail VRS any number of times from different employers, you can’t get tax exemption every time. The tax exemption of up to ₹5 lakh under Section 10 (10C) is a once-in-a-lifetime exemption.
What you should do
So should you take it or leave it?
“Those who are concerned about their job becoming redundant may consider opting for VRS. They can utilize the compensation received in re-skilling themselves or start a business. Either way, it is an individual’s choice about career options available to them," said Gupta.
Remember that VRS is not retrenchment, and you can’t be forced to take it. However, if you are confident of getting another job, VRS money can be pretty much like a bonus. “If you get VRS money and you are close to retirement age, you may or may not get a job; so invest the lump sum to generate passive income. POMIS (Post Office Monthly Income Scheme), debt mutual funds with SWP (systematic withdrawal plan) option is a good choice of instruments," said M. Barve, Mumbai-based independent financial adviser.
If you take VRS at a younger age, say, in your 40s, then your strategy should be different. “If you take up a new job and get regular income, you should invest the VRS lump sum into equity funds for a long term till your retirement," said Shah.
Also, note that you are free to take up another job after taking VRS from one company as long as you don’t work with the same management.