The Voluntary Retirement Scheme with its associated exemptions was inserted in the Income Tax Act way back in 1987. Ever since, there has been a misconception that the entire compensation has to be paid in a lump sum.
This payment at one go put a lot of financial pressure on the employers but they managed somehow. It was only when some public sector units, particularly the banks, offered their voluntary separation schemes, that things changed. However, this raked up several important issues.
The following is an interesting summary of an important case on the subject -- Y S C Babu & Another vs Chairman & Managing Director, Syndicate Bank & Others (2002) 173CTR151 (AP).
- Section 10(10C) stated (note the past tense) -- "any amount received by an employee of ... at the time of his voluntary retirement or termination of his service, ...".
The third proviso states, "where exemption has been allowed to an employee under this clause for any assessment year, no exemption thereunder shall be allowed to him in relation to any other assessment year."
This gave an impression that where the VRS amount was paid in two or more instalments the employee was eligible for the benefit of this section only in respect of the first instalment and not the subsequent ones.
That was not the intention of the legislation. Therefore, FA03 inserted the words 'or receivable' after the word 'received' in the opening part of this section. This has clarified that the exemption up to Rs 500,000is available on the entire VRS amount, even if paid in instalments.
- Under Section 15, "(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
"(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;
"(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year."
It is clear that the entire compensation payable under the VRS paid or accrued to the employees becomes a chargeable income.
- Section 192, provides for "TDS on income under the head 'Salaries' at the average rate of income tax computed on the basis of the rates in force for the FY in which the payment is made, on the estimated income of the assessee under this head for that FY."
Yes, under Section 15 the entire compensation payable under the VRS paid or accrued to the employees becomes a chargeable income but Section 192 requires TDS to be computed on payment made for the year during which the entire compensation under the VRS paid or accrued is an income chargeable to tax.
There appears to be an apparent contradiction between the two sections. The learned judge has correctly surmised that this is not so. The intention of the legislation is that it is necessary to arrive at the average of the income tax payable on the estimated income for the FY during which the first instalment is paid on the basis of the rates in force and thereafter deduct the tax payable only on the amount paid during the year.
As provided under Section 192, the income of every employee has to be estimated under the head 'Salaries' for the FY in question and thereafter, give effect to the exemptions that are available not only under Section 10(10C) but also under any other provisions of the act, such as standard deduction and rebate under Section 88, etc.
Several exemptions provided under the act have to be cumulatively applied while computing the annual income and not with reference to a particular payment.
Thereafter, one has to compute the average income tax on the basis of the rates in force for the FY. TDS has to be effected at that rate on the amount actually paid under the VRS and the other income chargeable to tax under the head, 'Salaries', at the time of such payment.
Consequently, as and when the subsequent instalments are paid, tax on these incomes has to be computed by applying the rate of tax thus arrived at. Exemptions, deductions and rebates can be claimed thereon as provided by the act.
Comments
Under Section 35DDA(1), amortisation of expenditure incurred under VRS is allowable to the employer in five equal instalments in respect of the amount paid (including payable, as per strict interpretation) under Section 35DDA.
Therefore, the employers will find it useful to spread the cash outflow arising out of VRS over a period of five years. Any interest paid to the employee on the periodical instalments received subsequently, will be directly a charge to profits and gains of the business for the previous year during which the interest is paid.
The employee will also find this arrangement useful because of two distinct reasons. The first and most important reason is that he does not have to suffer the entire tax upfront at the prevailing rates but be subjected to TDS as and when the instalments are paid.
Moreover, he gets rewarded by way of interest at a rate much higher than the market rate and from a very safe source, his erstwhile employer.
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