VRS Calculator

What a VRS is, and why the tax rules matter

A voluntary retirement scheme (VRS), called a voluntary separation scheme (VSS) in many public sector companies, is an offer from the employer to let employees leave before their normal retirement age in exchange for a lump sum. Banks, PSUs, government bodies and large companies use it to reduce headcount without retrenching anyone. Because the exit is voluntary, it is not retrenchment, and the payout comes from the scheme rather than the 15 days per year formula of the retrenchment rules.

The income tax law gives a one time exemption of up to Rs 5 lakh on this lump sum, but only when the employer, the employee and the scheme all meet the conditions. Getting any one wrong turns the whole amount into taxable salary, which at the 30 percent slab can cost lakhs. This calculator checks each condition in turn and shows the split.

The exemption under the Income-tax Act, 2025

From 1 April 2026 the Income-tax Act, 2025 replaced the 1961 Act. The voluntary retirement exemption moved from Section 10(10C) to serial number 12 of the table in Section 19, which lists deductions from salary. The amount allowed is the lower of:

1. the compensation received or receivable on voluntary retirement or voluntary separation; and
2. Rs 5,00,000.

Section 19 also carries over two older limits. Once the deduction has been allowed for one tax year, it cannot be claimed in any other tax year. And if relief under Section 157 (the arrears and advance salary relief, earlier Section 89) has been allowed on the amount, the deduction is not allowed on it.

Conditions the scheme must meet (Rule 20)

The scheme has to follow guidelines in Rule 20 of the Income-tax Rules, 2026, which carries forward Rule 2BA of the 1962 Rules. In summary:

• Service or age: the scheme applies to an employee who has completed 10 years of service or completed 40 years of age. This test is waived for employees of a public sector company under a voluntary separation scheme.
• Who is covered: all employees, including workers and executives, but not directors of a company or co-operative society.
• Headcount: the scheme must reduce the overall strength of employees, and the vacancies must not be filled.
• No re-employment in the group: the retiring employee must not be employed in another company or concern under the same management.
• Payout cap: the amount must not exceed 3 months' salary for each completed year of service, or salary at retirement multiplied by the months of service left before superannuation.

For this rule, salary means basic pay plus dearness allowance where the terms of employment include it, and leaves out all other allowances and perquisites. The Income Tax Department's retirement benefits guide lists the same conditions under the 1961 law.

Who counts as an eligible employer

Section 19 limits the exemption to employees of a public sector company, any other company, an authority set up under a Central, State or Provincial Act, a local authority, a co-operative society, a university, an Indian Institute of Technology, the Central or a State Government, and notified institutes of management and other notified institutions. A partnership firm, LLP, trust or individual employer is not on that list, so a VRS from one of them does not get this exemption, though the employee may still look at Section 157 relief.

A worked example (the sample values)

An officer in a company has basic plus DA of Rs 80,000 a month, 18 completed years of service, is 56 years old and has 22 months left before superannuation. The scheme offers Rs 15,00,000. This is the first VRS claim and no Section 157 relief is taken.

• Limit A: 3 × 18 × 80,000 = Rs 43,20,000
• Limit B: 22 × 80,000 = Rs 17,60,000
• Cap used (lower of the two): Rs 17,60,000, so the Rs 15,00,000 payout is within it
• Age and service test: met (18 years, and also over 40)
• Exempt: lower of Rs 15,00,000 and Rs 5,00,000 = Rs 5,00,000
• Taxable as salary: Rs 10,00,000, about Rs 3,12,000 of tax at the 30 percent slab plus 4 percent cess

If the same officer were offered Rs 4,00,000 instead, the whole amount would be exempt. If the officer were 35 with 8 years of service at a private company, the age and service test would fail and the full payout would be taxed, unless the scheme were a public sector company's voluntary separation scheme.

Section 19 exemption or Section 157 relief?

A large VRS payout can push income into a higher slab for one year. Section 157 of the Income-tax Act, 2025 (earlier Section 89) spreads that effect by recomputing tax as if the amount had been received over the years it relates to. You cannot take both on the same amount. A common rule of thumb in published guides is that the Rs 5 lakh exemption is usually better for smaller payouts, and relief can be worth checking when the payout is large and your earlier years were in lower slabs. Run the numbers both ways with the Arrears Relief Calculator before you file.

Old Act and new Act, side by side

Special cases to watch

Government approved schemes. In a case reported by Outlook Money (August 2026), the Chennai bench of the ITAT treated a BSNL VRS payout as compensation under a retrenchment scheme approved by the Central Government, where the Rs 5 lakh ceiling did not apply. That turned on the specific scheme and does not make every VRS fully tax free.

Instalments. If the scheme pays in instalments over more than one year, the exemption can still be claimed only once. Keep the scheme document and the employer's certificate with your return papers.

Employers planning a scheme. Write the eligibility, the payout formula and the no-refill commitment into the scheme document, and issue each employee a statement showing the salary figure used. When the business hires again later, an applicant tracking system keeps the new pipeline separate from the roles the scheme closed.

Assumptions this calculator makes

• The tax year is 2026-27 under the Income-tax Act, 2025 and the Income-tax Rules, 2026.
• The scheme meets the conditions you cannot enter here: it covers all employees except directors, reduces overall headcount, and the vacancy is not filled.
• The payout cap is checked against the lower of limit A and limit B.
• The tax estimate uses one marginal rate plus 4 percent cess and ignores surcharge, rebate and other income. Use the Income Tax Calculator for your full liability.
• Labour codes in force since 21 November 2025 do not change this income tax exemption; they matter for gratuity and other exit dues.

Frequently asked questions