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Instrucions for calculation of Arrears for employees and retirees (who retired after 1.11.2012)


On 19-7-08 Business line published an article written by T. C. A. Ramanujam - former Chief Commissioner of Income-Tax explaining the facts and eligibility for exemptions under the OERS.

1.Section 10(10C) of the Income-Tax Act, 1961 exempts payments received by a salaried employee from the employer under a Voluntary Retirement Scheme up to Rs 5 lakh. The law requires that the scheme should be framed in accordance with the guidelines prescribed in Rule 2 BA of the I-T Act.

2. No relief is available if the scheme is not approved prior to the date of voluntary retirement. Subsequent approval will not entitle a retired employee to claim exemption.

3.Section 10(10C) was inserted to make voluntary retirement attractive. Finance Act, 2003 amended Section 10(10C) so as to provide exemption from tax even if the amount received on voluntary retirement is paid in instalments.

•Guidelines for the scheme were framed under Rule 2BA which was inserted by the I-T (Sixteenth Amendment) Rules, 1992. The Rule prescribes that the scheme will be applicable to employees who have completed 10 years of service or reached the age of 40.

It is also required that the scheme should result in overall reduction in the existing strength of employees. Vacancy caused by voluntary retirement is not to be filled up.

The employee on retirement cannot be reemployed in any company under the same management. These are rather stringent rules.
The Reserve Bank of India (RBI) has been operating a VRS known as Optional Employees Retirement Scheme (OERS). Employees have been claiming exemption up to Rs 5 lakh in respect of amounts received on severance from the Bank.

The RBI, however, informed the employees that the OERS did not fulfil the guidelines laid down under Rule 2BA of the I-T Rules. •According to the RBI, the payment was in the nature of ex gratia and taxable. The RBI also deducted tax at source on all such payments. Choksi & Company, Chartered Accountants, informed the RBI that the scheme was not in conformity with Rule 2BA.

Employees of the RBI have been agitating the case for exemption up to Rs 5 lakh. They point out that the annual report of the RBI for 2003-04 referred to the need for the Bank to have technical upgradation towards streamlining the work in its general and core functions.

•On account of OERS, 4468 officers and employers were retired all over India. Manpower strength had come down. This was confirmed in the newsletter of the RBI. Those who opted for the scheme were mostly close to the retirement age. The central bank had the absolute discretion to accept or reject an OERS application.

•The RBI’s contention was that the OERS was a negotiated document which enabled employees to retire and pursue their interest actively. It was not drawn up for overall reduction in the existing strength of the employee. The fact may be that the scheme resulted in overall reduction in strength. This was not the intention behind the scheme.

•The employees however argued that the context of the scheme should be considered. Merely because the RBI or its auditors stated that the scheme was not in conformity with the requirements of Rule 2BA, exemptions cannot be denied.