₹39.96 lakh BSNL VRS payout gets full tax exemption from ITAT; here’s what the ruling means

A retired Bharat Sanchar Nigam Ltd (BSNL) employee has secured complete tax relief on a ₹39.96 lakh voluntary retirement payout after the Chennai bench of the Income Tax Appellate Tribunal (ITAT) held that the compensation received under the BSNL Voluntary Retirement Scheme (VRS)-2019 qualifies for exemption under Section 10(10B) of the Income-tax Act.

The ruling came in the case of Hemalatha Govindarajulu, who had initially paid tax on a substantial portion of the ex gratia compensation she received after opting for the BSNL VRS-2019 scheme. While filing her income tax returns for assessment years 2020-21 and 2021-22, she claimed only the ₹5 lakh exemption available under Section 10(10C), treating the remaining amount as taxable.

She later approached the tax authorities after learning about tribunal rulings that had recognised BSNL VRS compensation as retrenchment compensation eligible for exemption under Section 10(10B). Although her appeal before the first appellate authority was dismissed due to a delay of over four years, the ITAT admitted the matter and decided it on merits.

Why did ITAT allow full tax exemption?

In its order dated 21 May 2026, the Chennai bench comprising Vice President George George K and Accountant Member Padmavathy S held that the ex gratia compensation received under the BSNL VRS-2019 scheme is eligible for exemption under Section 10(10B).

The tribunal observed that the scheme was introduced as part of the Union Cabinet-approved BSNL revival package announced on 23 October 2019 and that the compensation was funded through budgetary support from the Government of India.

According to the tribunal, although the scheme was labelled as a voluntary retirement scheme, its character was that of a government-approved retrenchment scheme. It, therefore, could not be treated as an ordinary VRS covered only by Section 10(10C).

The tribunal directed the Assessing Officer to delete the tax additions made on the ex gratia compensation and grant consequential relief in accordance with law.

What does the ruling mean for taxpayers?

The order strengthens the judicial view that compensation received under the BSNL VRS-2019 scheme may qualify for exemption under Section 10(10B) instead of the limited ₹5 lakh exemption available under Section 10(10C).

However, the ruling does not mean that compensation received under every voluntary retirement scheme is automatically tax-free. The tribunal’s decision was based on the specific features of the BSNL VRS-2019 scheme, including its origin in the government’s revival package and its nature as a retrenchment measure.

For BSNL employees who opted for the 2019 VRS and paid tax on their ex gratia compensation, the ruling could serve as a persuasive precedent in similar disputes. The benefit, however, would depend on the facts of each case and the evolving judicial position on the issue.