What is VRS? Meaning, Features & More Explained

Most employees in India generally retire at the age of 60. It is the official retirement age for government employees, while private sector employees tend to retire anywhere between 58-62 years. Retirement age in the private sector depends on individual company policies. Not everyone needs to retire at a specific age. Some can choose to continue working while others can retire early.That said, early retirement is possible through meticulous and long-term financial planning, and of course, by earning in surplus during your active life. Retiring earlier is also possible by applying for the Voluntary Retirement Schemes (VRS) offered by employers.

VRS is easily the most amicable parting of ways between the employer and employees. The deal involves employees agreeing to the employer’s offer of early retirement and getting adequately compensated for it. Being a send-off with monetary benefits, it is also called a “golden handshake”.For employers, VRS means a solution to overstaffing with interested employees opting for voluntary retirement before reaching the company’s official retirement age. They are compensated, and the employer reduces manpower, which serves their respective objective.A common question often asked is, does VRS apply to private companies? Yes, many Indian companies including large PSUs and private companies have let a part of their workforce go in recent years. This is a cost-cutting measure for the employer, taken to maintain profits and face competition, while keeping the overall economic scenario in mind.Due to the provisions of the Industrial Disputes Act 1947 on practices like retrenchment and layoffs, there is a restriction on how companies trim their workforce. And so, being a mutual initiative, the Voluntary Retirement Scheme has become a popular alternative for employers.

The Indian government announced a Voluntary Retirement Scheme on 5th October 1988. Government VRS have seen various revisions since then. The New Economic Policy of 1991 addressed the need for the reduction of excess employees through an exit policy.Following this, the Voluntary Retirement Scheme was revised and made compliant with the Industrial Disputes Act 1947 to eliminate the social impact and legal issues associated with the downsizing at public enterprises.Banks, a major employer in pre-liberalisation India, saw the introduction of VRS under the Narasimham Committee II reforms. Presently, the Department of Public Enterprises oversees VRS in government offices.Today, private as well as public companies offer VRS to their employees. Such schemes continue to follow the rules and regulations defined by the Industrial Disputes Act 1947 regarding the separation of employees.

The VRS meaning is quite the same overall; let us have a look at some of its salient features -

• VRS means allowing an employee to opt for premature retirement
• VRS is not a right of employees
• The company cannot force an employee to choose or apply for VRS
• Both public and private companies can offer VRS
• The scheme offers a sizeable settlement amount which is calculated in an agreed and defined manner
• The Employee Provident Fund (EPF) and gratuity benefits are also offered as a part of the VRS settlement
• VRS compensation up to ₹5 lakh is exempt from income tax; it must be claimed the year the compensation is taken
• The employer also provides tax and financial consultation and counselling to aid the smooth retirement of the employee
• A position, if vacated through VRS, cannot be filled by the employer
• After choosing VRS, the employee cannot take employment in any organisation with the same management, i.e., in a sister concern or an associate company
• The accrued leave balance of the employee remains cancelled during the VRS notice period. However, leave-without-pay may be granted by employers at their discretion

The following are the eligibility criteria mandatory for availing of a VRS in India -

• A voluntary retirement scheme can be offered to employees who are at least 40 years of age
• The employee opting for voluntary retirement from a private company must have completed a minimum of ten years of service.
• In the VRS scheme for government employees, the minimum service requirement is 20 years. They must give a written request for VRS with a notice period of at least three months.
• The scheme is applicable to all employees, workers, and executives of a concerned company. It will be applicable no matter what name the employees are called.

The following employees/executives are generally excluded from the scope of VRS of a company -

• Directors of a cooperative society or directors of the company are not eligible for VRS
• Employees who are on deputation from the central or state government or other company; they are governed by the rules of their parent employer
• Temporary employees, casual employees, and contractual employees
• Trainees and apprentices employed under the Apprentices Act 1961

The eligibility rules of VRS are explained in detail in VRS Eligibility Rules - Selection Process .

Here are some of the typical reasons or situations where you can consider opting for VRS -

• Attractive severance package
• Desire to spend more time with family
• Plans to start a business Use the lump sum compensation package
• A better job offer elsewhere
• Ill health and/or spend more time and money on treatment and recuperation
• Receding motivation to work or poor job satisfaction
• Locational dissatisfaction; this is common among people who wish to return to their hometowns
• Doubts over the company’s growth prospect or viability of the company

Details for the infographic - Go for VRS if you want

• The lump sum payout,
• Spend time with family
• Go back to hometown
• Got a better job offer
• Have a brilliant business idea
• Not enjoying the job
• Unsure about your employer’s future

A company may offer VRS for various reasons. However, the basic purpose of VRS for a company is mostly to shed excess staff.

• VRS is offered by companies if its workforce is surplus to requirement. Right-sizing of manpower is an important aim for all employers
• VRS can help companies control their long-term fixed cost on employee salaries
• A company can reduce its staff to compete with newer and leaner enterprises
• The advent of disruptive technology can render a portion of the workforce redundant
• If an existing technology or product becomes redundant the employer may consider reducing the workforce
• Internal changes like a merger, acquisition or joint venture can drive the entity to reduce its workforce and offer VRS

Apart from the benefits that an employee and an employer can derive from VRS, the scheme is also popular for its operational ease.

• Unlike layoffs and retrenchments, a VRS is a mutually agreed process. The consent and initiative of the employee eliminate the possibility of disputes and litigation
• As VRS schemes are voluntary, there is generally no resistance from employees or labour unions
• VRS is a transparent process with strict compliance with the Industrial Disputes Act 1947

The calculation of VRS compensation may differ between companies due to differences in salary structure and HR policies. However, in India, a VRS calculator almost always takes the last drawn salary of the employer into account.

• VRS calculation based on salary - It is measured by considering the salary and the years of completed service. One way to calculate it is that the VRS compensation is equal to three months' salary for each of the full years of service
• VRS lump sum payout is also calculated by multiplying the last drawn salary with the remaining months in service till retirement
• In public sector banks, the compensation is the lesser of (a) 45 days' salary for each year of completed service or (b) the salary for the remaining period of service
• Unrecovered advances and loans, or other recoveries due from the employee may be recovered from the ex-gratia VRS payment mentioned above
• The company must settle the EPF and gratuity obligations related to the employee as a part of VRS formalities
• There is a cash equivalent of the earned leave accumulated in the employee’s name
• A retiring pension is granted to a government servant who retires through VRS, subject to fulfilment of the government retirement and pension rules

Apart from the financial compensation, VRS can also include non-monetary benefits like counselling on managing the compensation and the future, alternative skill development, rehabilitation and medical facilities, etc.To understand what VRS calculation is and how it works, you can also refer to our article here .

Central and state government employees are eligible for pension upon retirement. The applicability of pension in the case of such employees who opt for voluntary retirement is mentioned below -

• State and central government employees who have opted for VRS in compliance with government conditions are entitled to the periodic pension
• Such government employees who fulfil the minimum service period required for VRS can choose 50% of their emoluments or average emoluments as pension
• Upon completion of 80 years, the ex-employee becomes eligible for an additional compassionate allowance. This is given at a scale of 20-100%, with the advancing of age from 80 years to 100 years
• State and central government employees are also provided with a superannuation service gratuity. They can also commute their pension. The formula for commuted pension is: 40% x commutation factor x 12, where the commutation factor is based on the employee’s age at the time of commutation

Employees opting for voluntary retirement must keep this income tax-related information in mind -

• Calculate the total tax payable on the income earned, including the VRS compensation, additional salary, arrears, etc.
• Calculate the income tax rate on the total taxable income
• Calculate the total tax payable if one-third of the VRS ex-gratia amount is added to each of the three previous years
• Calculate the income tax rate on the three preceding years individually
• Calculate the average rate of tax on the three preceding years
• Rebate under section 89 is VRS ex-gratia amount x [Tax rate under step (b) MINUS tax rate under step (e)]

1. The amount received under the VRS scheme is taxable under the Income Tax Act under section 17(3), as an income from salaries.
2. The compensation received as a part of the VRS settlement from the company is exempt from income tax up to a maximum limit of ₹ 5 lakh. This benefit is provided under section 10(10C) of the Income Tax Act.
3. The retiring employee must file the income in the year in which it is received to avail of this tax benefit.
4. The exemption under section 10(10C) is available only once in the lifetime of an employee. Thus, even if a person receives VRS from different employers, the tax exemption will be available just once.
5. Several other retirement-related payments received are exempt from income tax. For instance, commuted pension is fully exempt for government employees and partially exempt* for other employees under section 10(10A), gratuity is exempt under section 10(10) up to ₹ 20 lakh, leave encashment is exempt under section 10(10AA) up to specified limits, and statutory provident fund receipts are exempt under section 10(11) and 10(12).* If gratuity is not received, half of the commuted value is exempt. If gratuity is received, one-third of the commuted value is exempt.
6. Relief under section 89 of the Income Tax Act - Section 89 is designed to provide relief to taxpayers who have received a large sum** of money through VRS or as arrears. To avail of the benefits of section 89, the following steps must be taken -

** Exemption under section 10(10C) and rebate under section 89 can both be availed if the amount received for VRS is Rs 5 lakh or more. Example of Section 89 relief Let us assume that -

• An employee’s VRS ex-gratia amount calculated is ₹ 20 lakh
• The income tax rate on the total income is 30% and
• The average tax rate of the three preceding years after including 1/3rd of the VRS receipts is 16%

The relief under section 89 is ₹ 20 lakh (30% minus 16%) = ₹ 2.8 lakh

Both the employer and the employee can face the downside of VRS.

• The company may lose skilled and competent employees through VRS. This can affect the productivity of the company
• Due to the generous ex-gratia payments made in VRS, the employer may end up incurring more expenses on VRS than what they could have recovered from the employee
• Regular VRS-driven outflow from a company will increase its labour turnover and can tarnish its reputation as an employer
• Large-scale employee outflow through VRS can affect the morale of the remaining employees

Similarly, an employee opting for a VRS exit can face disadvantages, such as -

• Active life keeps the person engaged and helps one to stick to a daily routine. The idleness of retired life can be difficult to cope with if an alternate occupation is not arranged
• Receiving a large sum of money in one go can lead to financial mismanagement and poor investing decisions
• The VRS ex-gratia payment considers the last drawn salary. However, if employed, the person may have achieved promotions and better pay packages in future

Air India -

• In March 2023, Air India offered its second VRS within a year
• It is offered to all permanent general cadre officers
• Applicants must be at least 40 years of age, and completed at least five years of continuous service
• One-time ex-gratia compensation is offered in the VRS, along with an additional incentive of ₹ 1 lakh to eligible employees
• The carrier plans to develop a new workforce and remove redundant roles in the company

Hero MotoCorp -

• Hero MotoCorp announced its VRS in early April 2023
• The offer is available to all staff members
• Employees opting for VRS will receive ex-gratia, variable pay, medical coverage, the right to retain a company car, relocation support, career support, gifts, and other incentives
• The company aims to consolidate the roles and make the organisation more agile by reducing excessive layers
• It expects to achieve more efficiency in the company and make it more productive

VRS offers employees the option to exit a company with a large pay cheque and an early retirement. However, early retirement through VRS means a longer retired life. An amount that may seem significant now may not be enough to last a lifetime.VRS applicants must consider the benefits of an early retirement and have a plan for the future. An alternate source of employment and astute use of the VRS receipts are key to financial freedom and security. A new job, a business, rental income etc. are some of the alternate incomes that a prematurely retired person should consider.Besides, a comprehensive financial plan, complete with an optimal portfolio can get the best out of your post-retirement investments.With these aspects considered and thought out, VRS can be the ideal opportunity for a working person opting for a well-compensated exit route from their existing job.