Retirement VRS-2019: New Rs 5 lakh tax exemption cap for BSNL, MTNL and other retirees

The Central Board of Direct Taxes (CBDT) has announced that the tax exemption on Voluntary Retirement Scheme (VRS) benefits under the 2019 scheme will be capped at Rs 5 lakh. This ceiling applies to retirees from BSNL, MTNL and other organisations that opted for VRS-2019, and it directly affects the amount of tax they will have to pay on their retirement payout.

What changed: the new Rs 5 lakh exemption limit

Earlier, VRS-2019 benefits were exempt under Section 10(10C) of the Income-Tax Act, 1961, subject to the condition that the employee had completed at least 10 years of continuous service. The exemption was previously linked to the actual amount received, subject to the overall limit of Rs 5 lakh for each employee under the scheme. The CBDT’s recent clarification reiterates that the maximum exemption remains Rs 5 lakh, irrespective of the total VRS payout.

In practical terms, if a retiree receives a VRS settlement of Rs 8 lakh, only Rs 5 lakh will be tax-free; the remaining Rs 3 lakh will be added to the retiree’s taxable income for the year of receipt.

Who is affected?

The cap applies to all employees who opted for the VRS-2019 scheme, including:

• Former BSNL staff who took VRS under the 2019 round.
• Former MTNL staff who took VRS under the same scheme.
• Employees of other central or state-run enterprises that offered VRS-2019 on similar terms.

It does not affect retirees who left service before the VRS-2019 announcement, nor does it apply to VRS benefits granted under earlier schemes such as VRS-2015, which have their own exemption limits.

What it means in practice – a simple worked example

Consider a former BSNL employee, Mr. Sharma, who completed 12 years of service and opted for VRS-2019. He receives a total settlement of Rs 9 lakh, broken down as follows:

• Basic salary component: Rs 4 lakh
• Gratuity component: Rs 2 lakh
• Other allowances: Rs 3 lakh

Under the new rule, the first Rs 5 lakh of this amount is exempt under Section 10(10C). The remaining Rs 4 lakh is taxable. Assuming Mr. Sharma has no other income in the financial year, his taxable income will be Rs 4 lakh. At the applicable slab rates for FY 2025-26 (under the 1961 Act), the tax liability would be calculated as per the normal rates, with the standard deduction and rebate, if any, applied.

This example shows that the exemption cap can reduce the tax burden, but any amount above Rs 5 lakh will be fully taxable.

How to claim the exemption and deadlines

To claim the exemption, retirees must:

1. Obtain the VRS settlement statement from the employer, clearly showing the total amount received and its breakup.
2. Report the exempt portion (up to Rs 5 lakh) in the "Exempt Income" section of the Income Tax Return (ITR-1 or ITR-2, as applicable).
3. Include the taxable portion in the "Income from Salary" head.

The return for the financial year in which the VRS amount is received must be filed by the usual deadline – typically 31 July for individuals filing online. If the retiree is filing a revised return, the same deadline applies for the revised filing.

Common mistakes to avoid

Retirees often make the following errors:

• Claiming the full VRS amount as exempt. Only up to Rs 5 lakh qualifies; the rest must be taxed.
• Omitting the VRS breakup. The tax department may request the detailed settlement; failure to provide it can lead to notices.
• Using the wrong ITR form. Employees with only salary and VRS income can use ITR-1; those with other heads of income must use ITR-2 or higher.

Another frequent oversight is not adjusting the taxable portion for the applicable surcharge and cess, which can increase the final tax payable.

Key dates and next steps

Retirees should keep the following timeline in mind:

1. Receipt of VRS settlement: Usually within 30 days of acceptance of the VRS offer.
2. Issuance of Form 16/16A: Employer should provide the tax deduction certificate reflecting the taxable portion.
3. Filing of ITR: By 31 July of the assessment year (e.g., for FY 2025-26, the deadline is 31 July 2026).

It is advisable to consult a tax professional if the VRS amount is close to the exemption limit, to ensure correct computation and avoid penalties.

Frequently asked questions

Is the Rs 5 lakh cap a new rule?

The cap itself is not new; it has been the statutory limit for VRS-2019 benefits under Section 10(10C). The recent CBDT clarification simply re-affirms that the limit remains Rs 5 lakh for all retirees under the scheme.

Can I claim the exemption if I received the VRS amount in installments?

Yes. The exemption is calculated on the total amount received in the financial year. If the settlement is paid in two installments, add both amounts and apply the Rs 5 lakh limit.

What if my total VRS payout is less than Rs 5 lakh?

In that case, the entire amount is exempt under Section 10(10C), and you will have no tax liability on the VRS benefit for that year.

Do I need to pay advance tax on the taxable portion?

If the taxable portion pushes your total income above the basic exemption limit, you may be required to pay advance tax as per the usual schedule (15 % by 15 June, 45 % by 15 September, etc.). Failure to do so can attract interest under Section 234B.

Sources

• Income Tax Department e-filing portal
• Income Tax Act & Rules
• BSNL, MTNL VRS-2019: CBDT caps tax exemption at Rs 5 lakh for retirees — Business Standard

Reviewed: November 2026. Tax rules change — verify the current financial year and assessment year before you rely on any figure.

This is general educational information for Indian taxpayers, not personalised tax, legal or financial advice. Union of Taxpayers is an independent platform and not a government body. Consider a qualified professional for your specific situation.