VRS payout tax: Is severance pay taxable? Pune ITAT rules ₹65.21 lakh Pfizer retirement payout was not taxable

A ₹65.21 lakh payment received by a former Pfizer Healthcare India employee under a voluntary retirement scheme (VRS) is not taxable, the Pune Bench of the Income Tax Appellate Tribunal (ITAT) has ruled.

In its order dated June 8, 2026, in Prakash Sukhdeo Sonawane vs Income Tax Officer, Ward-1(1), Aurangabad, ITA No. 2180/PUN/2025 for assessment year (AY) 2019-20, the tribunal held that the payment received under Pfizer's voluntary retirement scheme was a capital receipt and not chargeable to tax.

The tribunal also held that Section 56(2)(xi) of the Income-tax Act, 1961, did not apply because, under the scheme, the employee had voluntarily retired/resigned and his employment had not been terminated by the company.

Why the employee received ₹65.21 lakh

The taxpayer was an employee of Pfizer Healthcare India Pvt. Ltd. at its Aurangabad plant. The company had framed the Pfizer Healthcare India Private Limited Finance Scheme for Employees at Aurangabad, 2019 following its decision to close the plant.

The employee opted for voluntary retirement under the scheme. During FY 2018-19, he received an aggregate ₹65,21,105.

The amount comprised ₹50,70,250.01 as ex-gratia/severance pay, ₹12 lakh as early-bid and group-participation incentives, and ₹2,50,855.80 as a three-month notice-period payout.

When filing his return for AY 2019-20, the taxpayer did not initially claim the ₹65.21 lakh as a capital receipt. Instead, he claimed ₹21,77,119 relief under Section 89 on the basis that the amount represented advance salary.

The Assessing Officer disallowed the Section 89 relief. During the subsequent appellate proceedings, the taxpayer claimed that the ₹65.21 lakh should instead be treated as a capital receipt and should not be taxed.

The CIT(A)/NFAC rejected this argument and treated the amount as taxable under Section 56(2)(xi) as income from other sources. The appellate authority held that the amount was received in connection with termination of employment.

Why Section 56(2)(xi) did not apply

The key issue before the Pune ITAT was whether the employee's voluntary retirement under Pfizer's scheme amounted to termination of employment for the purpose of Section 56(2)(xi).

The provision covers compensation or other payment received in connection with termination of employment or modification of the terms and conditions of employment.

The tribunal examined the specific terms of Pfizer's scheme.

Clause 11(viii) of the scheme stated that employees opting for voluntary retirement would not be entitled to compensation or notice pay under the Industrial Disputes Act because their cessation from employment constituted resignation and did not constitute retrenchment or termination of employment by the company.

The tribunal also noted another clause of the scheme stating that employees opting for the scheme would not raise any dispute about their separation because the separation resulted from their voluntary resignation under the scheme.

Further, the application form showed that Sonawane had voluntarily resigned from Pfizer with effect from February 8, 2019.

The ITAT therefore found that there was no termination of employment by Pfizer. The employee had voluntarily retired/resigned under the scheme..

ITAT holds ₹65.21 lakh payment was a capital receipt

The tribunal also considered earlier decisions involving employees of Pfizer who had received similar payments under the same scheme.

It noted that the Pune ITAT had consistently held in similar cases that payments received under the Pfizer scheme were capital receipts and were not chargeable to tax.

The tribunal specifically referred to its earlier decision in Ashok Raghunathrao Kulkarni vs ITO, involving an employee covered by the same Pfizer scheme. In that case, the tribunal had held that the ex-gratia payment was voluntary and was not compensation falling within Section 17(3).

The Pune ITAT also noted that similar payments received by other Pfizer employees had been accepted as capital receipts by the respective Assessing Officers in reassessment proceedings.

After considering the facts and the legal position, the tribunal concluded that the lower authorities had not correctly applied the law and had failed to follow the position established in the earlier cases involving similarly placed Pfizer employees.

The ITAT therefore set aside the order of the CIT(A)/NFAC and directed the Assessing Officer to modify the assessment.

For Sonawane, the result was that the ₹65.21 lakh received under the Pfizer scheme was treated as a capital receipt and not brought to tax. His appeal was allowed by the Pune ITAT on June 8, 2026.