A recent decision in the case of an employee of a public sector bank will delight those who are planning to opt for voluntary retirement schemes (VRS), which are on offer by their employer companies. The order, recently issued by the Commissioner (Appeals), Bangalore, states that an additional relief will be available to those who opted for VRS, over and above the exemption limit of Rs 5 lakh, in respect of sums received at the time of voluntary retirement or separation.
VRS is gaining popularity as companies work under strict cost control measures. Trimming the extra flab is one measure to ensure greater cost efficiency. Public sector banks and undertakings and nationalised insurance companies often come out with VRS to cut costs and improve their profitability. The most recent VRS scheme that is on offer, is for the four non-life insurance companies of United India, National Insurance, Oriental Insurance and New India Assurance.
Currently, a sum of up to Rs 5 lakh received under this scheme is exempt in the hands of employees under Section 10(10C) of the Income-Tax Act, 1961. But another issue arises. Owing to the receipt of money under the VRS, the income for that particular year is highly inflated, leading to a disproportionate amount of income-tax. This is because India, like several other countries, has adopted a progressive method of taxation. In other words, the more you earn, higher is your taxable slab and the more tax you pay. Another Section of the I-T Act, Section 89(1), read with Rule 21A, prescribes some relief in instances where salary income is received in advance or in arrears. This is done by spreading the arrears of salary over the past years to which they relate.
In case of lump sum payments received under VRS, tax authorities do not readily provide this relief of spreading over the income over several years. Their contention is that the relief under Section 89(1) is admissible only in cases of salary received in advance or salary in arrears and the VRS amount is a lumpsum package amount.
At present, as many as 30,000 tax payers have filed appeals all over India, asking for this tax relief. Perhaps this recent order will offer some succour. Arun Bhatnagar, commissioner (Appeals), Bangalore, in his order, has held that the retired employee is entitled to relief under Section 89(1) of the I-T Act, in respect of the taxable portion of the amount received at the time of voluntary retirement or even voluntary separation.
This relief would be available on the amount of income received under the VRS after having deducted the tax exempt portion of Rs 5 lakh.
The order further points out that Section 89(1) clearly specifies that any payment is a profit in lieu of salary is entitled to relief. There is no specific condition that the amount should have been received only in arrears.
As relief is claimed under Section 89(1) on the unexempted portion of the VRS amount received, the question of claiming the benefit twice does not arise. To put it more clearly, Section 10(10C) applies only to the exempt income while Section 89(1) applies to the unexempted portion.
In Bangalore, a spate of orders granting such relief will soon be issued. Tax payers can only hope that commissioners (Appeals) in other parts of India will adopt a similar stand. Meanwhile, the final say will perhaps be that of the tax tribunal, where the tax department has gone for appeal.
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