What Is a Voluntary Retirement Scheme?

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In today's era, many people are choosing to retire from their office jobs before their retirement date. Nowadays, most individuals aim to accumulate as much wealth as they can before they turn 40 to explore and pursue their passion.

The process of retiring before the retirement period is called voluntary retirement. Both public and private companies offer VRS to their employees. Furthermore, retirement is no longer associated with old age or bad health.

A voluntary retirement scheme (VRS) benefits both an employee and a company. This is because an organisation manages to reduce employee strength and save expenses. The term "Golden Handshake" is also used to refer to a VRS.

A company lets its employee make an early retirement at amicable terms through this scheme. Many big corporations in India tend to use this scheme to reduce their workforce. Subsequently, the Industrial Dispute Act (1947) was created to stop big corporations from misusing this scheme.

Organisations use VRS to reduce their workforce, but the ultimate power lies in the hands of an employee. As a result, it is very different from termination, and it is considered a cordial way of letting go of employees.

An employee who has completed ten years of service in a particular organisation and is above 40 can apply for VRS. This scheme applies to a company's employees and executives and the cooperative society's authority. However, this will not apply to directors of a company and/or cooperative.

According to the rules of VRS, it should lead to a reduction in the overall employee strength of an organisation. A company cannot fill vacant positions with new and younger candidates. If an employee working at Public Sector Undertaking (PSU) takes a voluntary retirement, the PSU needs to get government approval before it can offer VRS to any employee.

Furthermore, firms can frame more schemes as long as they abide by the rules under Rule 2BA of the Income Tax Act. An essential guideline under Rule 2BA is that employees granted voluntary retirement cannot work in another organisation's subsidiary.

The eligibility criteria for the voluntary retirement scheme are as follows.

• An employee has to be over the age of 40 years.
• The said employee has been employed under an organisation for over ten years.
• A company cannot rehire an employee in its subsidiary or sister company.
• Directors of a company and/or cooperative are not eligible for this for VRS. 

Below are specific rules of VRS that both the company and its employees applying for VRS should follow:

• A voluntary retirement scheme is a scheme that allows organisations to reduce their employee strength. This is done so that organisations can save on expenses and increase productivity. It cannot hire more employees to fill these vacant positions.
• The employee who has applied for VRS cannot apply to work in the same organisation’s subsidiary or a sister organisation. However, such employees are free to work again in another company.

A few basic features of a voluntary retirement scheme are as follows:

• Before an organisation can offer VRS to an employee, it is required to clear all his/her due payments, starting from a provident fund to gratuity. 
• Employees who apply for VRS receive tax-free compensation from the company for their ten years of service. However, this compensation is tax-free up to ₹5 lakh under Section 10 (10C) of the Income Tax Act. If the employee wants to claim these benefits, they must file a claim in the same assessment year where they have received their compensation.
• An organisation offering VRS needs to provide the employee with tax consultation to smooth out the employee's retirement process.
• The employee applying for VRS will receive 45 days of salary for every year they have worked for the organisation. In addition, they can also receive monthly payments during retirement. This particular compensation is multiplied by an employee’s remaining months of service before the actual retirement date.