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.
The matter was considered by the Calcutta High Court in writ petition in 4957/W/2004.
The court felt that, prima facie, money received on account of voluntary retirement up to Rs 5 lakh was not taxable. Neither the opinion of the chartered accountants nor the views of the RBI will finally determine the fate of exemption claimed under Section 10(10C).
According to the court, the scheme fulfilled the requirements of Section 2BA and exemption was available up to Rs 5 lakh. The employee is also eligible to claim simultaneous benefit under Section 10(10C) as well as relief under Section 89 for arrears of salary. Emphasis is on amount receivable and not on the manner, method or mode of payment. All that is required is that the limit prescribed should be adhered to in granting exemption. Terminal benefits cannot be brought within the scope of “amount received” under Section 10(10C).
The interpretation placed on the RBI’s OERS has been uniformly accepted by all the Benches of the Income-Tax Appellate Tribunal (ITAT) in India. No decision has been brought on record to deny exemption.
The analysis of Section 10(10C) of the Act and Rule 2BA of the I-T Rules contained in the detailed order of the Three Member Bench of the ITAT (in 302 ITR AT 49 Lucknow), will be of immense value not merely to the RBI employees but also to employees in other organisations claiming the benefit of exemption for VRS compensation up to Rs 5 lakh