Big tax relief: How a former BSNL employee won full VRS exemption at Chennai ITAT

In a notable tax ruling, the Chennai bench of the Income Tax Appellate Tribunal (ITAT) has granted complete tax relief to a former Bharat Sanchar Nigam Limited (BSNL) employee who opted for the company’s VRS-2019 Scheme. The woman employee had initially paid tax on her ex gratia compensation after claiming only the ₹5 lakh deduction available under Section 10(10C) for Assessment Years 2020-21 and 2021-22.

After coming across favourable judicial precedents, she challenged the earlier tax treatment and sought full exemption. The tribunal ruled in her favour, following the reasoning adopted in a similar case by the ITAT Chandigarh involving a former employee and the Income Tax Officer.

Why BSNL VRS compensation received full tax exemption

The Chennai ITAT noted that BSNL’s VRS-2019 was part of a wider revival package for BSNL and MTNL that was approved by the Union Cabinet on 23 October 2019. The ex-gratia payments under the scheme were funded directly through budgetary support provided by the Union government.

The tribunal consequently held that the scheme was not simply a conventional voluntary retirement programme. Instead, it possessed the legal characteristics of a government-approved retrenchment mechanism. On this basis, the compensation qualified for complete exemption under Section 10(10B) of the Income-tax Act.

Tax experts said the former employee succeeded because the Chennai ITAT accepted that the compensation paid under BSNL VRS-2019 was, in substance, retrenchment compensation rather than ordinary VRS compensation. However, they cautioned that the ruling does not mean compensation received under every VRS scheme will automatically become tax-free.

How VRS compensation is taxed for govt and private employees

Tax treatment of VRS payments depends on factors including the employer, the nature of the scheme and the relevant provisions of the Income-tax Act, 1961.

Under Section 10(10C) of the Income-tax Act, 1961, employees of public-sector companies, other companies, statutory authorities, local authorities, cooperative societies, universities, IITs, the Central or State governments and specified institutions can claim an exemption of up to ₹5 lakh on amounts received upon voluntary retirement or separation. The scheme must satisfy conditions prescribed under Rule 2BA of the Income-tax Rules, 1962.

The ₹5 lakh VRS exemption can generally be claimed only once during an employee’s lifetime. Any amount above the permitted exemption is normally taxable as salary income.

Thus, for both government and private-sector employees, VRS compensation generally receives exemption under Section 10(10C), provided the prescribed conditions are met.

However, if the payment is legally classified as retrenchment compensation rather than voluntary retirement compensation, Section 10(10B) may apply. This provision covers retrenchment compensation received under the Industrial Disputes Act, 1947, or another applicable law, subject to prescribed limits.

The central government notified ₹5 lakh as the monetary ceiling for retrenchments occurring on or after 1 January 1997, through Notification No. 10969 dated June 25, 1999. Under the 1961 Act, the exemption is therefore generally limited to the lowest of the actual compensation, the statutory amount based on service and ₹5 lakh.

What changes under Income Tax Act, 2025

Under the Income-tax Act, 2025, the corresponding benefit is available as a deduction under Section 19(1), Table, Sl. No. 10. The deduction is limited to the lowest of the compensation received, the amount calculated under Section 25F(b) of the Industrial Disputes Act, 1947, and the amount notified by the central government, which cannot be below ₹50,000.