Severance / VRS Tax

VRS vs ordinary severance

Section 10(10C) exempts up to ₹5,00,000 received under a legitimate Voluntary Retirement Scheme (VRS) approved by the employer's board and conforming to Rule 2BA — the scheme must apply uniformly to all eligible employees, be cost-saving in nature, and not be re-employed in a sister company. Anything above ₹5L is taxed at slab. Pure severance / lay-off packages (non-VRS) get no exemption — they are fully taxable as salary in the year of receipt, after deducting only the standard ₹75,000 (new regime) / ₹50,000 (old regime).

Worked example

A 52-year-old Bengaluru manager takes voluntary retirement under a Rule-2BA compliant VRS with a ₹22 lakh payout. The first ₹5L is exempt under 10(10C); the remaining ₹17L stacks on top of salary income that year. If she also received ₹8L salary up to the VRS date, total taxable income is around ₹25L — pushing her into the 30% slab on the increment. New-regime tax on the full ₹25L works out to roughly ₹4.2L. The exemption saves about ₹1.55L vs no exemption.

When to use this

• Tech / banking lay-off packages — usually NOT 10(10C) eligible
• PSU and bank VRS schemes — typically Rule-2BA compliant, qualify for ₹5L
• Mid-career break or early retirement with a one-time settlement
• Planning when to take the package — March vs April matters for tax bracket

Note: the 10(10C) exemption can be claimed only once in a lifetime. Combine with gratuity calculator (also exempt up to ₹20L under 10(10)) for the full exit package math.