Income-Tax exemption on payments received at the time of voluntary retirement

Section 10(10C)

Amount RECEIVED IN ACCORDANCE WITH ANY SCHEME OR SCHEMES OF VOLUNTARY RETIREMENT


76. Clarification of queries regarding guidelines for purposes of section
10(10C)

Clause (10C) of section 10 of the Income-tax Act, 1961, deals with income-tax
exemption on payments received at the time of voluntary retirement. The
provisions of this clause which covered earlier only the payments received by
employees of public sector companies have been amended by the Finance Act, 1992,
to include therein the payments received by employees of companies other than
public sector companies also. Under the amended provisions of this clause, the
payments on account of voluntary retirement are to be exempt from income-tax
only if the schemes governing the said payments are in accordance with the
guidelines prescribed in this behalf. It has further been provided that such
guidelines may include the criteria of economic viability. In the case of
companies other than public sector companies, the schemes are not only to be in
accordance with the prescribed guidelines but are also to be approved by the
Chief Commissioner or, as the case may be, the Director General in this behalf.
The amended provisions apply in relation to assessment year 1993-94 and
subsequent years.

2. The guidelines for the purposes of section 10(10C) of the Income-tax Act have
been laid down in the Income-tax Rules, 1962, by inserting a new rule 2BA
therein. The guidelines provide that the scheme of voluntary retirement framed
by a company should be in accordance with the following requirements, namely :—

(i) it applies to an employee of the company who has completed ten years of
service or completed 40 years of age;

(ii) it applies to all employees (by whatever name called), including workers
and executives of the company excepting Directors of the company;



(iii) the scheme of voluntary retirement has been drawn to result in overall
reduction in the existing strength of the employees of the company;



(iv) the vacancy caused by voluntary retirement is not to be filled up, nor the
retiring employee is to be employed in another company or concern belonging to
the same management;



(v) the amount receivable on account of voluntary retirement of the employees,
does not exceed the amount equivalent to one and one-half months’ salary for
each completed year of service or monthly emoluments at the time of retirement
multiplied by the balance months of service left before the date of his
retirement on superannuation. In any case, the amount should not exceed rupees
five lakhs in case of each employee; and



(vi) the employee has not availed in the past the benefit of any other voluntary
retirement scheme.







3. The Income-tax (Sixteenth Amendment) Rules, 1992, inserting rule 2BA
regarding guidelines for the purposes of section 10(10C) in the Income-tax
Rules, was notified on 18-8-1992 and also came into force with effect from the
said date.







4. The Board have received a number of queries with reference to these
guidelines. These are clarified as under :



Question 1 – As rule 2BA regarding guidelines for the purposes of section
10(10C) has come into force with effect from 18-8-1992, whether the payments
made under the schemes of voluntary retirement between 1st April to 18th August,
1992 will get the benefit of income-tax exemption?



Answer – The provisions of section 10(10C) of the Income-tax Act have been
amended through Finance Act, 1992, with effect from 1-4-1993. Accordingly, the
amended provisions will apply in relation to assessment year 1993-94 and
subsequent years. Though the rule containing the guidelines for the purposes of
section 10(10C) came into force with effect from 18-8-1992, the payments
received between 1-4-1992 and 18-8-1992 by the retiring employees of a company
under the voluntary retirement scheme will also be entitled for income-tax
exemption under section 10(10C) of the Income-tax Act, provided the voluntary
retirement scheme is in accordance with the guidelines contained in the said
rule and satisfies the conditions laid down in the section.



Question 2 – Are the companies permitted to offer different schemes of voluntary
retirement to different classes of employees, provided the payments thereunder
do not exceed the monetary limit prescribed in the guidelines ?



Answer – Yes. The companies can frame different schemes of voluntary retirement
for different classes of their employees. However, these schemes have to conform
to the guidelines prescribed in rule 2BA of the Income-tax Rules.



Question 3 – Is the amount representing the lower of the two limits specified in
item (v) of rule 2BA (the limits being the amount equivalent to one and one-half
months’ salary, for each completed year of service or monthly emoluments at the
time of retirement multiplied by the balance months of service let before the
date of retirement on superannuation) to be allowed under the scheme of
voluntary retirement?



Answer – Item (v) of rule 2BA does not require that the amount representing the
lower of the aforesaid two limits is to be allowed under the scheme of voluntary
retirement. The amount receivable by an employee on account of his voluntary
retirement can be either of the aforesaid two amounts. However, the amount which
will qualify for exemption under section 10(10C) will be up to rupees five lakhs
only.



Question 4 – What is the meaning of expressions ‘salary’ and ‘monthly
emoluments’ used in item (v) of rule 2BA ?



Answer – These expressions mean salary including dearness allowance, if the
terms of employment so provide, but exclude all other allowances and
perquisites.



Question 5 – When payment is to be computed on the basis of one and one-half
months’ salary for each completed year of service, whether the different levels
of salaries for each completed year of service are to be taken instead of the
last salary drawn?



Answer – It is the last salary drawn which is to form the basis for computing
the amount of payment.



Question 6 – Where the amount receivable on account of voluntary retirement
exceeds rupees five lakhs in case of an employee, whether the entire amount
receivable or only the excess of the amount above rupees five lakhs is to be
subjected to income-tax?



Answer – Only the amount representing the excess above the limit of rupees five
lakhs is to be subjected to income-tax.



Question 7 – If the amount receivable by way of voluntary retirement is
calculated on the basis of a formulation other than what has been specified in
item (v) of rule 2BA and such amount does not exceed rupees five lakhs, will
such amount be entitled to income-tax exemption?



Answer – The amounts receivable on account of voluntary retirement of an
employee which are not in accordance with the guidelines contained in rule 2BA,
are not entitled to income-tax exemption under section 10(10C) of the Income-tax
Act.



Question 8 – Whether the amount receivable on account of voluntary retirement of
an employee of a company which has been set up less than ten years ago is
entitled to income-tax exemption under section 10(10C)?



Answer – One of the requirements in the guidelines prescribed for schemes of
voluntary retirement is that the scheme should apply to an employee of a company
who has completed ten years of service or forty years of age. Since the employee
of a company (presuming that he is less than forty years of age) which has been
set up less than ten years ago, cannot satisfy the aforesaid requirement, the
amount receivable by him shall not be entitled to income-tax exemption under
section 10(10C).



Question 9 – Can the scheme of voluntary retirement be made applicable to the
employees of an undertaking of a company rather than the entire company ?



Answer – Item (iii) of rule 2BA provides that the scheme of voluntary retirement
should be drawn to result in overall reduction in the existing strength of the
employees of the company. If the said condition is met, the scheme framed can be
made applicable to the employees of an undertaking of a company rather than the
entire company itself.



Question 10 – Can a scheme of voluntary retirement be drawn to result in overall
reduction in the existing strength of the employees of an undertaking of a
company instead of the entire company?



Answer – Item (iii) of rule 2BA specifies that the scheme of voluntary
retirement should be drawn to result in overall reduction in the existing
strength of the employees of a company. This requirement reflects the criterion
of economic viability for framing the schemes of voluntary retirement. The
scheme which does not result in overall reduction in the existing strength of
the employees of a company will not be in accordance with the guidelines
prescribed for the purposes of section 10(10C).



Question 11 – In deciding the issue of economic criteria, whether only the cases
of loss-making companies are to be considered?



Answer – The requirement in the guidelines which reflects the economic criterion
is to the effect that the scheme of voluntary retirement has been drawn to
result in overall reduction in the existing strength of the employees of the
company. Therefore, schemes can be drawn even by profit-making companies.



Question 12 – Whether income-tax exemption on the amount of voluntary retirement
is available when the amount payable is in addition to normal retirement
benefits like provident fund, gratuity, pension, etc., payable under the terms
governing the employment?



Answer – Yes. The provisions regarding income-tax exemption on the amount
receivable on account of voluntary retirement are separate from the provisions
which govern taxation of provident fund, gratuity, pension, etc.



Question 13 – Whether any tax needs to be deducted at source by the employer
from the amount of voluntary retirement when all the conditions specified in
section 10(10C) and rule 2BA are satisfied?



Answer – No. If all the conditions specified in section 10(10C) read with rule
2BA are satisfied, the employer need not deduct tax at source from the amount of
voluntary retirement to an employee.



Circular : No. 640, dated 26-11-1992.







76A. Whether eligible for relief under section 89(1) also – Clarification
regarding



The issue as whether relief under section 89 would be eligible for amount of
compensation under voluntary retirement scheme in excess of limits of exemption
provided under section 10(10C) of Income-tax Act, 1961 has been considered in
the board in consultation of with the Ministry of Law in view of the judgment of
case of CIT v. M. Raman. The Ministry of Law advised filing of a Special Leave
Petition (SLP) in the case and accordingly SLP against the said Judgment has
been filed in honorable Supreme Court.



2. This may kindly be brought to the notice of all the official working in the
area.



Circular No. F.No. 184/7/2003-ITAT, dated 4-3-2004.