Voluntary Retirement Receipts [Section 10(10C)] :

Compensation received by an employee at the time of voluntary retirement is exempt from tax subject to the following conditions:

Eligible Undertakings – The employee of the following undertakings are eligible for exemption under this clause:
(i) Public sector company

(ii) Any other company

(iii) An authority established under a Central/State or Provincial Act

(iv) A local authority

(v) A co-operative society

(vi) An University established or incorporated under a Central/State or Provincial Act and an Institution declared to be an University by the University Grants Commission.

(vii) An Indian Institute of Technology

(viii) Such Institute of Management as the Central Government may, by notification in the Official Gazette, specify in this behalf

(ix) Any State Government

(x) The Central Government

(xi) An institution, having importance throughout India or in any state or states, as the Central Government may specify by notification in the Official Gazette.

Limit : The maximum limit of exemption should not exceed Rs 5 lakh.

Such compensation should be at the time of his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or, in the case of public sector company, a scheme of voluntary separation. The exemption will be available even if such compensation is received in installments. The schemes should be framed in accordance with such guidelines, as may be prescribed and should include the criteria of economic viability.

Guidelines: Rule 2BA prescribes the following guidelines for the purposes of the above clause:

1. It applies to an employee of the company or the authority, as the case may be, who has completed 10 years of service or completed 40 years of age. However, this requirement is not applicable in case of an employee of a public sector company under the scheme of voluntary separation framed by the company.

2. It applies to all employees by whatever name called, including workers and executives of the company or the authority except directors of a company or a cooperative society.

3. The scheme of voluntary retirement or separation must have been drawn to result in overall reduction in the existing strength of the employees of a company or the authority or a cooperative society.

4. The vacancy caused by the voluntary retirement or separation must not be filled up.

5. The retiring employee of a company shall not be employed in another company or concern belonging to the same management.

6. The amount receivable on account of voluntary retirement or separation of the employee must not exceed the amount equivalent to three months‘ salary for each completed year of service or salary at the time of retirement multiplied by the balance months of service left before the date of his retirement or superannuation.

Note – Where any relief has been allowed to any assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under section 10(10C) shall be allowed to him in relation to that assessment year or any other assessment year.
Illustration
Mr. Dutta received voluntary retirement compensation of Rs 7,00,000 after 30 years 4 months of service. He still has 6 years of service left. At the time of voluntary retirement, he was drawing basic salary Rs 20,000 p.m.; Dearness allowance (which forms part of pay) Rs 5,000 p.m. Compute his taxable voluntary retirement compensation, assuming that he does not claim any relief under section 89.

Solution

Voluntary retirement compensation received	Rs 7,00,000
Less: Exemption under section 10(10C) [See Note below]	Rs 5,00,000
Taxable voluntary retirement compensation	Rs 2,00,000

Note: Exemption is to the extent of least of the following:

(i) Compensation actually received	= Rs 7,00,000
(ii) Statutory limit	= Rs 5,00,000
(iii) Last drawn salary × 3 × completed years of service = (20,000 + 5,000) × 3 × 30 years	= Rs 22,50,000
(iv) Last drawn salary × remaining months of service = (20,000 + 5,000) × 6 × 12 months	= Rs 18,00,000