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Content Page no.
1 Introduction, Definition And Description 2
2 Other Known Terms 3
3 Voluntary Retirement Scheme (VRS) info 4
4 Circumstances for VRS 5
5 Why VRS 6
6 VRS exemption from income tax 7
7 Announcements while implementing VRS scheme 8
8 VRS benefits 9
9 Payment 10
10 Eligibility 11
11 Procedure 12
12 Conclusion 13


Voluntary Retirement Scheme


The Voluntary Retirement Scheme (VRS) is the latest mantra of many a corporate and
Public sector units. VRS is a scheme whereby the employee is offered to voluntarily retire
from his services before his retirement date. Subject to certain conditions the company offers
VRS to its employees It is the golden route to cut the excess flab

Definition: Voluntary retirement scheme is a method used by companies to reduce surplus
staff. This mode has come about in India as labour laws do not permit direct retrenchment of
unionized employees.

Description: VRS applies to an employee who has completed 10 years of service or is above
40 years of age. It should apply to all employees (by whatever name called), including
workers and executives of a company or of an authority or of a co-operative society,
excepting directors of a company or a co-operative society.

It has to result in an overall reduction in the existing strength of employees. The vacancy
caused by voluntary retirement is not to be filled up. The retiring employee shall not be
employed in another company or concern belonging to the same management. The amount
receivable on account of voluntary retirement of the employee does not exceed the amount
equivalent to three months' salary for each completed year of service, or salary at the time of
retirement multiplied by the balance months of service left before the date of retirement on
superannuation of the employee. It is the last salary drawn which is to form the basis for
computing the amount of payment.

Most large public and private sector companies have implemented VRS in recent years.




The most humane technique to retrench the employees in the company today is the voluntary
retirement scheme. It is the golden handshake for the employees and the only option today for
the companies to reduce organization staff. The scheme which is formally permitted by the
Department of Public Enterprises and which provides the lucrative way for the employees to
terminate their services and accept VRS.

As the name suggests the VRS is strictly voluntary i.e. one can neither compel the workers to
accept it nor apply it selectively to certain individuals. One can however choose the levels,
units and age groups among whom one wants to offer VRS. The company can always accept
or reject the application for the VRS.


VSS is a scheme where employees are allowed to resign voluntarily from the company by
receiving fair compensation. The purpose of implementing VSS is to cut down the number of
workers the employees will be given a reasonable compensation for resigning from the
company. It is because firing employees lead to a bad reputation for the co.


Voluntary Retirement Scheme (VRS)

In the present globalised scenario, right sizing of the manpower employed in an organisation
has become an important management strategy in order to meet the increased competition.
The voluntary retirement scheme (VRS) is the most humane technique to provide overall
reduction in the existing strength of the employees. It is a technique used by companies for
trimming the workforce employed in the industrial unit. It is now a commonly method used
to dispense off the excess manpower and thus improve the performance of the organisation. It
is a generous, tax-free severance payment to persuade the employees to voluntarily retire
from the company. It is also known as 'Golden Handshake' as it is the golden route to
In India, the Industrial Disputes Act, 1947 puts restrictions on employers in the matter of
reducing excess staff by retrenchment, by closures of establishment and the retrenchment
process involved lot of legalities and complex procedures. Also, any plans of retrenchment
and reduction of staff and workforce are subjected to strong opposition by trade unions.
Hence, VRS was introduced as an alternative legal solution to solve this problem. It allowed
employers including those in the government undertakings, to offer voluntary retirement
schemes to off-load the surplus manpower and no pressure is put on any employee to exit.
The voluntary retirement schemes were also not subjected to not vehement opposition by the
Unions, because the very nature of its being voluntary and not using any compulsion. It was
introduced in both the public and private sectors. Public sector undertakings, however, have
to obtain prior approval of the government before offering and implementing the VRS.

Solid citizen





A business firm may opt for a voluntary retirement
scheme under the following circumstances:-

Due to recession in the business.

Due to intense competition, the establishment becomes unviable unless downsizing is
resorted to.

Due to joint-ventures with foreign collaborations.

Due to takeovers and mergers.

Due to obsolescences of Product/Technology.

Though the eligibility criteria for VRS varies from company to company, but usually,
employees who have attained 40 years of age or completed 10 years of service are eligible for
voluntary retirement. The scheme applies to all employees including workers and executives,
except the directors of a company. The employee who opts for voluntary retirement is
entitled to get forty five days emoluments for each completed year of service or monthly
emoluments at the time of retirement multiplied by the remaining months of service before
the normal date of service, whichever is less. Along with these benefits, the employees also
get their provident fund and gratuity dues. Compensation received at the time of voluntary
retirement is exempt from tax under section 10 (10C) of the Income Tax Act, 1961 upto the
prescribed amount upon fulfilling certain stipulated conditions. However, the retiring
employee should not be employed in another company or concern belonging to the same



Improving efficiency:
Twenty organizations stated that they were not able to survive in the global business
environment and were unable to face fierce competition without improving their efficiency.
Reduction of employees and wage bill was one of the measures taken to attain these
objectives. Results indicated that only five of them improved their performance.
Responding to decline in sales and increase in cost:
Seven organizations stated that they were offering VRS because business had become
unviable due to decline in sales and increase in cost. Only two of them improved their
Reducing overhead costs:
Most of these organizations responded through VRS once they got into a difficult situation.
Their VRS was frequently not coupled with strategic reorientation. Consequently, these
organizations were unable to improve their performance after VRS.
Protecting long-term interests of the organization:
The organizations that took a long-term view of VRS and coupled it with strategic change
management initiatives have performed better. Two of the three organizations that stated the
purpose of VRS to serve the long-term interest of the organization improved their
performance after VRS.
Achieving technological advancement:
Advancement of technology as a reason for manpower reduction. None of them could
improve performance. This result is to be taken with care as inadequate project
implementation could have led to decline in performance.
Restructuring the organization:
Restructuring was cited as a reason for downsizing in five organizations. This is in line with
the literature (Freeman, 1994) that major hierarchical changes drive downsizing. However,
such firms are frequently unable to anticipate appropriate structure to improve their
performance in a dynamic business environment.

Voluntary Retirement Scheme
Exemption from income tax

Voluntary retirement scheme (VRS) is an early retirement option given by the employer to
its eligible employee by compensating them for taking a early retirement. Most of the public
sector banks, PSU and private companies opted for voluntary retirement scheme (VRS) in
past to restructure their organization. Voluntary retirement scheme (VRS) is also accepted by
trade union as its legally allowed by companies to off-load there surplus manpower.
Income tax act provides an exemption up to Rs. 5, 00, 000 for Voluntary retirement scheme
i.e. amount received up to Rs. 5, 00,000 will be exempted and the balance amount will be
taxable in the hands of employee under the head salary.
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. The guidelines for the purposes of section 10(10C) of the
Income-tax Act have been laid down in the rule 2BA of the Income-tax Rules.
The guidelines provide that the scheme of voluntary retirement framed by a company should
be in accordance with the following requirements, namely:

It applies to an employee of the company who has completed ten years of service or
completed 40 years of age

It applies to all employees (by whatever name called), including workers and
executives of the company excepting Directors of the company

The scheme of voluntary retirement has been drawn to result in overall reduction in
the existing strength of the employees of the company

The vacancy caused by voluntary retirement is not to be filled up, nor is the retiring
employee to be employed in another company or concern belonging to the same

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

The employee has not availed in the past the benefit of any other voluntary retirement

Some companies offers very attractive package of benefits to the employees who opt for
VRS. For example, the VRS scheme may also include providing counselling to employees
about their future; managing of funds received under the scheme; offering rehabilitation
facilities to them etc.

A company may make the following announcements
while implementing a voluntary retirement scheme:-

The reasons behind downsizing the organisation.

The eligibility criteria for voluntary retirement scheme.

The age limit and the minimum service period of employees who can apply for the

The benefits that are offered to the employees who offer to retire voluntarily.

The rights of the employer to accept or reject any application for voluntary retirement.

The date up to which the scheme is open.

The income tax benefits and income tax incidence related to the scheme.

It should also indicate that the employees who opt for voluntary retirement and accept the
benefits under such scheme shall not be eligible in future for employment in the organisation.
Voluntary Retirement Schemes have been legally found to be giving no problem to
employers, employees and their unions. But, the retrenchment plans of an organization must
be compatible to its strategic plans. Its procedure and reasons for introduction must be
discussed with all management staff including top management. One need to identify
departments or employees to whom VRS is applicable and thereby formulate its terms and
conditions and also state the benefits that would be available to those who took VRS. Such
information should be made available to every employee of the organization, mentioning the
period during which the scheme will be open. Also, existing employees might face insecurity
because of fear of losing their job too. One of the possible drawback of the VRS is that the
efficient employees would leave the company while the inefficient may stay back. Thus it is
the /responsibility of the employer to motivate them and remove their apprehensions and

Voluntary Retirement Benefit

The employees opting for voluntary retirement will be paid

Salary/Wages up to the date of Voluntary retirement.
Encashment of balance Annual Leave with wages as on the date of Voluntary
Gratuity upto the date of Voluntary Retirement
Bonus upto the date of Voluntary retirement
In case of P.F company shall complete necessary document/formalities to facilitate
processing of payment

For Workers

Wages Means Basic wage + FDA+ VDA (excluding allowance & Perks) on the
date of Voluntary retirement.
90 (Ninety ) days of salary / wages (Basic + DA) for each completed year of service
Monthly salary / wages ( Basic + DA) at the time of retirement multiplied by the
balance months of service left before normal date of retirement
Whichever is lower subject to a maximum of Rs.4 (Four) Lacs in case of each
For Staff

Salary Means Salary (Excluding allowances & perks) on the date of Voluntary
60 (Sixty) days of basic salary for each completed year of service.
Monthly Basic Salary at the time of retirement multiplied by the balance months of
service left before normal date of retirement.
Whichever is lower subject to maximum of Rs.4 (Four) lacs in case of each employee
Other benefits

An employee whose offer for Voluntary Retirement under the Scheme is accepted will be
eligible, apart from the ex-gratia defined above, to any benefit that would have been available
to him upon superannuation as per the policy extant in the PSU prior to the date of
notification of this scheme. It is clarified, however, that an employee shall not be eligible for
both retrenchment compensation and ex-gratia under this scheme but shall have to opt for one
of the two



Private sector

On the acceptance of Voluntary retirement, company will make payment to the employees as
All statutory/legal dues Salary, gratuity and Leave Encashment will be paid within
15 days from the date of voluntary retirement - subject to vacation from Accounts,
store, Library and other department, as per rules of the company.
For Voluntary retirement benefit, the management has decided to offer 100% payment
at the time of Voluntary retirement. However if the employee so desires can stagger
the payment of voluntary retirement compensation in two instalments of 50% each.
The first instalment of VRS by management and second instalment will be paid after
one year with interest @ 10%.

In public sector

Amount of ex-gratia:

An employee seeking Voluntary Retirement under the scheme will be entitled to the
compensation consisting of salary of 35 days for every completed year of service and 25 days
for every year of the balance of service left until superannuation. The compensation will be
subject to a minimum of Rs.25, 000/- or 250 days salary whichever is higher. However, this
compensation shall not exceed 80% of the sum of the salary that the employee would draw at
the prevailing level for the balance of the period left before superannuation.
In case an employee is governed by a retiring/superannuation pension scheme the
disbursement of pension shall commence from the month next to the date an employee would
have retired in the ordinary course.

Mode of payment:

100% of the amount of ex-gratia payable to an employee on opting for Voluntary Retirement
under this Scheme would be paid in cash within 60 days from the date of his relieving


Private sector

All the permanent employees (Worker, staff & officers) who have completed the age
of 50 year and have directly worked in an organisation for minimum of 10 years will
be eligible for the scheme.
Directors of the company will not be covered by this scheme.
In public sector

All persons employed on permanent/regular basis working against regular sanctioned graded
post of Public Sector Undertakings will be eligible to seek Voluntary Retirement provided
they have completed a minimum of 5 years of service and have at least 5 years of service
remaining before their superannuation.
However, the employees falling in the following categories as determined by the concerned
PSU are not eligible to seek Voluntary Retirement under the scheme:
Specialist employees who have executed service bonds and have not completed the
period prescribed therein;

Employees serving abroad under special arrangement/bonds;

Employees appointed on contract basis;

Any other category of employees as may be specifically debarred by the Public
Sector Undertaking from seeking retirement under this scheme.

In case disciplinary action is pending against an employee, who has sought Voluntary
Retirement, the Disciplinary Authority shall, after considering all facts, convey to the
Competent Authority whether the request of the employee should be accepted or not. In case

the Disciplinary Authority decides that the request of such an employee for Voluntary
Retirement be not accepted, the same shall be communicated to the employee in writing and
he shall have a right to make an appeal as provided under section 9 (v).


Private sector

An Application for voluntary retirement should be made by the employee in the
prescribed form to the Departmental Head by obtaining acknowledgement with
specific time and date of submission.
No withdrawal of the application once submitted for voluntary retirement shall be
allowed for any reason whatsoever
Final acceptance will be only after approval of the president (Works)

In public sector

An eligible employee may submit request opting for Voluntary Retirement under the
scheme to the Competent Authority through proper channel in a prescribed proforma
(Annexure-A), which shall be available in the PSU.
The Competent Authority may after considering the application and after giving an
opportunity to the applicant of being heard, pass a speaking order within a period of 3
months, either accepting or rejecting the request.
In case the Competent Authority fails to pass an order rejecting the request by the due
date as given at sub para (ii) above, the request would be deemed to have been
accepted and the employee would be retired.
A copy of every order made under paragraph (iii) above shall be given to the
An employee who is aggrieved by an order of rejection may within thirty days from
issuance of such orders file an appeal before the Administrative Secretary of the
Department under which the concerned PSU falls, whose decision shall be final and
The date of acceptance of VRS by the competent authority will be treated as date of
voluntary retirement.


VRS scheme involves downsizing which involves
person as well as post, so proper initiative should be
taken into consideration and management must
make sure that employee opting for VRS scheme
must resign with satisfaction and it should not hurt
feelings of an employee involving pride and dignity