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

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.