Effects of Excess manpower:-

(1)Excess manpower results in high labour costs which increases the production
cost and thus ending in high product or service costs.

(2) It reduces the competitive ability oI the enterprise.

(3) Excess manpower in any business activity or industrial establishments reduces
employee eIIiciency and labour productivity.

(4) Surplus human resources pose threat Ior technology upgradation which is
essential in the competitive market.

(5) Surplus labour may result in poor industrial relations and unrest amongst
labour.

Reducing Excess Manpower - Problems, Legal Aspects and
Solutions

s already pointed out earlier the Industrial Disputes ct, 1947 as it is existing
puts restrictions on employers in the matter oI reducing excess staII by
retrenchment, by closures oI establishment. The unions strongly oppose any plans
oI retrenchment and reduction oI staII and workIorce. The Government had taken
a decision to amend the Labour Laws, whereby the employers could trim its
workIorce legally aIter complying with the conditions oI the labour laws.
However, the unions in our country have been opposing such amendment oI labour
laws. For reasons, which include political reason, the Government has not
implemented its decision to amend the Industrial Disputes ct, 1947. However, a
way was Iound by allowing employers including those in the government
undertakings, to oIIer voluntary retirement schemes to oII-load the surplus
manpower. The voluntary retirement schemes were not vehemently opposed by
the Unions, because the very nature oI its being voluntary and not using any
compulsion.
Exit Policy
Voluntary Retirement Schemes - have been legally Iound to be giving no problem
to employers, employees and their unions. The essence oI the voluntary retirement
scheme, which is approved by the Government - involves voluntary separation
oI employees who are above the age oI 40 years or have served the company or
establishment Ior minimum 10 years. The company, may oIIer diIIerent separation
beneIits to employees in diIIerent age groups subject to overall beneIits which are
tax exempted up to a limit oI Rs. 51akh.

COMPENSATION MANAGEMENT

government beIore oIIering and implementing the voluntary retirement schemes.



The Reasons for Proposing VRS

(1) Recession in business

(2) Intense competition, which makes the establishment unviable unless
downsizing is resorted to

(3)Changes in technology, production process, innovation, new
product line

(4) Realignment oI business - due to market conditions

(5) Joint-ventures with Ioreign collaborations

(6) Takeovers and mergers

(7) Business re-engineering process

(8) Product/Technology obsolencences. Procedure Ior Voluntary Retirement
Scheme The employer has to issue a circular communicating his decision
to oIIer voluntary retirement scheme - mentioning therein.

(a) The reasons Ior downsizing
(b) Eligibility i.e. who are eligible to apply Ior voluntary retirement
(c) The age limit and the minimum service period oI employees who can apply
(Employees who is 40 and above and those who have completed minimum 10 years
oI service in the establishment.)

(d) The beneIits that are oIIered. It should be noted that employees who oIIer to
retire voluntarily are entitled as per law and rules the beneIits oI Provident Fund,`
Gratuity and salary Ior balance oI privilege leave up to the date oI their retirement,
besides the voluntary retirement beneIits.

(e) The right oI an employer to accept or reject any application Ior voluntary
retirement. The date up to which the scheme is open and applications are received
Ior consideration by the employer.

(g) The circular may indicate income tax incidence on any voluntary retirement
beneIits which are in excess oI Rs. 5 lakhs, which is maximum tax Iree beneIit under
such schemes.

(h) It should also indicate that those employees who opt Ior voluntary retirement
and accept the beneIits under such scheme shall not be eligible in Iuture Ior
establishment. Steps to be taken Ior introducing and implementing voluntary
retirement scheme

(1) II the company is public sector undertaking obtain approval
oI the government.

(2) IdentiIy departments/employees to whom VRS is to be oIIered (Target group oI
employees -age above 40 years and employees with more than 10 years service in
the company).

(3) II there is a union oI employees in the establishment involve the union by
communicating to them the reasons, the target group and the beneIits to be oIIered
to those who opt Ior the scheme.

(4)Formulate terms oI V R S and beneIits to be oIIered are to be mentioned in the
circular or communication to employees and decide the period during which the
scheme is to be kept open.

(5) Motivate the managers through counseling.

(6) Counselling employees is an essential part oI implementing the scheme. The
counselling should include what the retiring employee can do in Iuture i.e.
rehabilitation, how to manage the Iunds received under the scheme.

(7) Iter receipt oI applications Ior accepting \IRS, scrutinize, decide whose
applications are to be accepted and those whose are not to be accepted.

(8) For those whose application are to be accepted prepare a worksheet showing
the beneIits each will receive including other dues like Provident Fund, gratuity
and earned leave wages Ior the balance un-availed earned leave, and tax incidence
should the V R S` amount exceed Rs. 5 lakhs. The challenges in implementing
employees Exit
(1) The reasons and need to introduce V R S should be discussed with all
management staII including top management.

(2) The eIIect oI downsizing including on the work or activitiesoI the
establishment carried on is to be considered i.e. post reduction operations to be
carried on should also be planned - post plan reduction employee deployment.

(3) Ensure all concerned employees and managers participate in the decision
making to down size.
(4) The downsizing plan should match with the Strategic plans oI the company.

(5)Transparency should be seen and used in choice oI persons

VCLUN1Ak kL1IkLMLN1


A NC1ICL LkICD

An employee who has aLLalned Lhe age of 30 years or who has compleLed 20
years of quallfylng servlce may reLlre from servlce by glvlng a noLlce of noL less
Lhan Lhree monLhs ln wrlLlng dlrecL Lo Lhe appolnLlng auLhorlLy wlLh a copy
marked Lo hls lmmedlaLe superlor Cfflcer 8efore glvlng such noLlce he may
saLlsfy hlmself by means of a reference Lo such auLhorlLy LhaL he has compleLed
Lhe requlred mlnlmum number of years or quallfylng servlce

2 Crders should be obLalned from Lhe compeLenL auLhorlLy on Lhe volunLary
reLlremenL before Lhe explry of Lhe noLlce perlod of Lhree monLhs 1he
accepLance or oLherwlse of Lhe proposal for volunLary reLlremenL shall be
lnLlmaLed Lo Lhe employee before Lhe explry of Lhe noLlce perlod of Lhree
monLhs

3 An employee may wlLhdraw Lhe noLlce of volunLary reLlremenL or wlLhdraw hls
volunLary reLlremenL afLer accepLance subsequenLly wlLh Lhe approval of Lhe
appolnLlng auLhorlLy before Lhe explry of Lhe perlod of noLlce

4 1he Lhree monLhs noLlce may be glven before Lhe employee aLLalns Lhe age of
30 years or compleLlon of 20 years lf quallfylng servlce provlded LhaL Lhe
reLlremenL Lakes place afLer he has aLLalned Lhe age 30 years or compleLed 20
years of quallfylng servlce


3 WheLher Lhe employee lssues Lhe noLlce of volunLary reLlremenL Lo Lhe
appolnLlng auLhorlLy dlrecLly or Lhrough proper channel Lhe noLlce perlod Lakes
effecL from Lhe daLe of recelpL of Lhe noLlce by Lhe appolnLlng auLhorlLy only

6 1he lasL Lhree monLhs perlod should necessarlly be a conLlnuous one and
should noL lnclude perlod of exLraordlnary leave wlLhouL pay and allowances
When exLraordlnary leave wlLhouL allowances runs concurrenLly wlLh Lhe perlod
of noLlce Lhe leave should be refused and Lhe employee may be requesLed Lo [oln
lmmedlaLely and glve a fresh noLlce of noL less Lhan Lhree monLhs CLherwlse Lhe
requesL for volunLary reLlremenL may be negaLlved

ACCL1ANCL CI VCLUN1Ak kL1IkLMLN1

7 noLlce of volunLary reLlremenL shall be accepLed sub[ecL Lo Lhe fulflllmenL of
Lhe followlng condlLlons


a) no ulsclpllnary proceedlngs ls conLemplaLed or pendlng agalnsL Lhe employee
for lmposlLlon of any ma[or penalLy

b) no prosecuLlon ls conLemplaLed or pendlng ln a courL of law agalnsL Lhe
employee

c) no enqulry ls conLemplaLed or pendlng agalnsL Lhe employee ln Lhe records of
Lhe vlgllance

d) no dues whlch cannoL be recovered from Lhe uC8C are pendlng Lo be
recovered

e) 1here should be no conLracLual obllgaLlon pendlng agalnsL Lhe employee for
Lhe perlod subsequenL Lo hls volunLary reLlremenL

lf an employee who was awarded punlshmenL of sLoppage of lncremenL wlLh
or wlLhouL cumulaLlve effecL wanLs Lo reLlre volunLarlly and lf he comes forward
Lo remlL Lhe moneLary equlvalenL of Lhe punlshmenL such requesL shall be
consldered and he shall be allowed Lo reLlre volunLarlly

9 lf an employee under suspenslon or agalnsL whom dlsclpllnary acLlon ls pendlng
seeks Lo reLlre volunLarlly Lhe speclflc permlsslon of Lhe approprlaLe auLhorlLy
shall be necessary Clearance ls also necessary from Lhe ulrecLoraLe of vlgllance
and AnLlCorrupLlon

10 lf no orders accepLlng or re[ecLlng Lhe volunLary reLlremenL are lssued before
Lhe explry of Lhe noLlce perlod Lhen Lhe volunLary reLlremenL wlll become
deemed

11 A reporL shall be obLalned from Lhe vlgllance cell also ln addlLlon Lo Lhe
reporL from Lhe ulrecLoraLe of vlgllance and AnLlcorrupLlon ln respecL of Lhe
employees of Lhe 1nL8 who are ln forelgn servlce and deslre Lo geL volunLary
reLlremenL from Lhe 8oard servlce

12 lL ls enough lf Lhe appolnLlng auLhorlLy concerned ls saLlsfled LhaL no crlmlnal
case ls pendlng or conLemplaLed agalnsL Lhe employee who opL for volunLary
reLlremenL and lL ls lefL Lo Lhe appolnLlng auLhorlLy Lo conLacL Lhe Speclal 8ranch
Clu or oLher concerned organlsaLlons for Lhls purpose


C VCLUN1Ak kL1IkLMLN1 CI kWI WCkkLkS

13 1he 8WL Workmen Lo whom Lhe penslon scheme has been exLended wlLh
effecL from 176 have become ellglble Lo seek volunLary reLlremenL wlLh
reference Lo Lhe provlslons ln 8egulaLlon 17(gg) of Lhe 8oard's Servlce
8egulaLlons An employee ls permlLLed Lo seek volunLary reLlremenL afLer
aLLalnlng Lhe age of 30 years or afLer puLLlng ln 23 years of servlce ln pursuance of
Lhe orders ln 8no 76 daLed 17176 or afLer puLLlng ln 20 years of quallfylng
servlce ln pursuance of Lhe orders lssued ln 8 no117 daLe 10979 excludlng
Lhe beneflL of welghLage as Lhe case may be

C WLIGn1AGL CI SLkVICL CN VCLUN1Ak kL1IkLMLN1

14 An employee reLlrlng volunLarlly shall be glven a welghLage of servlce noL
exceedlng 3 years sub[ecL Lo Lhe condlLlon LhaL Lhe LoLal quallfylng servlce
rendered lncludlng Lhe welghLage does noL ln any case exceed 30 years and lL
does noL Lake hlm beyond Lhe daLe of superannuaLlon as Lhe case may be for Lhe
purpose of penslon and graLulLy


13 1he welghLage glven ls only Lo lncrease Lhe perlod of quallfylng servlce 1he
penslon and graLulLy wlll be based on Lhe acLual emolumenLs on Lhe daLe of
reLlremenL (8 no 3 daLed 2269


16 1he addlLlon of welghLage ls for calculaLlon of penslon and noL for calculaLlon
of graLulLy

17 1he welghLage wlll noL enLall Lo any noLlonal flxaLlon of pay for calculaLlon of
penslon and graLulLy wlLh effecL from 1796

18oLh age and quallfylng servlce shall be Laken lnLo conslderaLlon
slmulLaneously and care should be Laken LhaL afLer addlng such welghLage Lhe
LoLal no of quallfylng servlce does noL exceed 30 years and aL Lhe same Llme lL
does noL exceed 3 years/60 years of age as Lhe case may be

19 WelghLage added Lo quallfylng servlce for Lhose who reLlre on compleLlon of
3 years of age

20 ln Lhe case of offlce Pelpers uaffadars eLc whose reLlremenL age ls 60 years



Age We|ghtage

33 ears 3 ?ears
36 ?ears 4 ?ears
37 ?ears 3 ?ears
3 ?ears 2 ?ears
39 ?ears 1 ?ear





21 WelghLage of 3 years shall be llmlLed upLo Lhe ellglblllLy for full penslon and
uC8C calculaLlon accordlngly

221he penslon shall be based on Lhe average emolumenLs drawn durlng Lhe lasL
10 monLhs prlor Lo Lhe daLe of such volunLary reLlremenL CraLulLy shall be based
on Lhe acLual emolumenLs drawn on Lhe daLe of such volunLary reLlremenL

Voluntary Retirement Scheme (VRS)

In the present globalised scenario, right sizing oI 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 oI the employees. It
is a technique used by companies Ior trimming the workIorce employed in the
industrial unit. It is now a commonly method used to dispense oII the excess
manpower and thus improve the perIormance oI the organisation. It is a
generous,tax-Iree severance payment to persuade the employees to voluntarily
retire Irom the company. It is also known as 'Golden Handshake' as it is the golden
route to retrenchment.
In India, the Industrial Disputes ct,1947 puts restrictions on employers in the
matter oI reducing excess staII by retrenchment, by closures oI establishment and
the retrenchment process involved lot oI legalities and complex procedures. lso,
any plans oI retrenchment and reduction oI staII and workIorce 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 oIIer voluntary retirement schemes to oII-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 oI 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 oI the government beIore
oIIering and implementing the VRS.
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 Ioreign collaborations.

Due to takeovers and mergers.

Due to obsolescences oI Product/Technology.
Though the eligibility criteria Ior VRS varies Irom company to company, but
usually, employees who have attained 40 years oI age or completed 10 years oI
service are eligible Ior voluntary retirement.The scheme applies to all employees
including workers and executives, except the directors oI a company. The
employee who opts Ior voluntary retirement is entitled to get Iorty Iive days
emoluments Ior each completed year oI service or monthly emoluments at the time
oI retirement multiplied by the remaining months oI service beIore the normal date
oI service,whichever is less. long with these beneIits, the employees also get their
provident Iund and gratuity dues. Compensation received at the time oI voluntary
retirement is exempt Irom tax under section 10 (10C) oI the Income Tax ct, 1961
upto the prescribed amount upon IulIilling certain stipulated conditions.
However,the retiring employee should not be employed in another company or
concern belonging to the same management.
The companies can Irame diIIerent schemes oI voluntary retirement Ior diIIerent
classes oI their employees. However, these schemes have to conIorm to the
guidelines prescribed in rule 2B oI the Income-tax Rules. The guidelines Ior the
purposes oI section 10( 10C ) oI the Income-tax ct have been laid down in the
rule 2B oI the Income-tax Rules. The guidelines provide that the scheme oI
voluntary retirement Iramed by a company should be in accordance with the
Iollowing requirements, namely :
It applies to an employee oI the company who has completed ten years oI
service or completed 40 years oI age

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

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

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

The amount receivable on account oI voluntary retirement oI the employees,
does not exceed the amount equivalent to one and one-halI months salary Ior
each completed year oI service or monthly emoluments at the time oI
retirement multiplied by the balance months oI service leIt beIore the date oI
his retirement on superannuation. In any case, the amount should not exceed
rupees Iive lakhs in case oI each employee, and

The employee has not availed in the past the beneIit oI any other voluntary
retirement scheme.
Some companies oIIers very attractive package oI beneIits to the employees who
opt Ior VRS. For example, the VRS scheme may also include providing
counselling to employees about their Iuture;managing oI Iunds received under the
scheme; oIIering rehabilitation Iacilities 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 Ior voluntary retirement scheme.
The age limit and the minimum service period oI employees who can apply
Ior the scheme.

The beneIits that are oIIered to the employees who oIIer to retire voluntarily.

The rights oI the employer to accept or reject any application Ior voluntary
retirement.

The date up to which the scheme is open.

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

It should also indicate that the employees who opt Ior voluntary retirement
and accept the beneIits under such scheme shall not be eligible in Iuture Ior
employment in the organisation.
Voluntary Retirement Schemes have been legally Iound to be giving no problem to
employers, employees and their unions. But, the retrenchment plans oI an
organization must be compatible to its strategic plans. Its procedure and reasons Ior
introduction must be discussed with all management staII including top
management. One need to identiIy departments or employees to whom VRS is
applicable and thereby Iormulate its terms and conditions and also state the
beneIits that would be available to those who took VRS. Such inIormation should
be made available to every employee oI the organization, mentioning the period
during which the scheme will be open. lso,existing employees might Iace
insecurity because oI Iear oI losing their job too. One oI the possible drawback oI
the VRS is that the eIIicient employees would leave the company while the
ineIIicient may stay back. Thus it is the /responsibility oI the employer to motivate
them and remove their apprehensions and Iears

Retirement Benefits
On the day oI retirement, almost every employee smarts under a sense oI injustice.
He is Iorced to make room Ior some halI-baked proIessional just when he himselI
is ready Ior a doctorate in competency. Be that as it may, it is necessary to plan Ior
this eventuality and hence every employee must know not only the quantum oI the
various terminal beneIits he would be getting, but also their tax implications. The
employee may have higher quantum oI beneIits by being Iortunate in choosing a
good employer but he has no choice in respect oI taxes. Within certain limits, the
terminal beneIits are exempt. Let us have a good look at the terminal beneIits.



Provident Fund

There are 3 types oI Provident Funds:
1
Statutory Provident Fund under the Provident Fund ct, 1925 maintained
by government and semi-government organisations, local authorities,
universities, recognised educational institutions, railways, airlines etc. This
is a blue-eyed baby. Everything is exempt Irom tax, without any iIs and
buts, including the employer's contribution and the interest paid, even iI it
is over 12.
2
Recognised Provident Fund (RPF) covered by Employee's Provident Fund
and Miscellaneous Provisions ct, 1952 applicable to establishments with
20 or more employees. Those with Iewer employees are also welcome to
opt Ior it. The PF Commissioner manages the Iunds. However, iI the
establishment desires to manage its own Iunds, a trust approved by the IT
Commissioner, has to be created which will invest the Iunds in accordance
with the PF Rules. Employee's contributions are covered by Sec 88 and
there is no ceiling on his voluntary contribution. Employer's contribution in
excess oI 12 oI employee's salary as well as interest paid exceeding 9.5
p.a. is charged to tax. Payment oI accumulated balance in RPF is taxable
under Rule 9(1) oI Schedule IV() to the IT, unless the employee renders
continuous service with his employer Ior 5 years or the discontinuance is
due to causes beyond control oI the employee. This balance is also exempt
iI it is transIerred to the employee's individual account in any RPF
maintained by his new employer or by the PF commissioner. Service under
his Iormer employer or employers shall be included in computing the total
period oI continuous service. Out oI the total contribution oI the employer
(12 oI basic salary oI the employee), 8.33 or Rs 542 whichever is less,
is deposited in the Employee Pension Fund and the balance to the
Employee Provident Fund as illustrated below:
Basic
Salary of
Employee
Employer's
Total
Contribution
(12 of Basic
Salary)
8.33
of
Salary
Rs
542
Contribution
Pension Fund
(Least of 'b'
and 'c')
Contribution
Provident
Fund (3.67)
Rs (a) (b) (c) (d) (e) (a - d)

Rs Rs Rs Rs Rs
4,600 552 383 542 383 169
8,100 972 675 542 542 430

The current rate oI interest on this Pension Fund Deposit is 9.5, likely to
be reduced to 8 Ior the next Iiscal.
3
Unrecognised Provident Fund, not approved by the IT Commissioner, is a
bad baby deserving heavy punishment. II the number oI employees is less
than 20, the PF Commissioner Iinds it inconvenient to handle this small
account. The employer does not have the wherewithal to establish a trust
and Iollow the investment norms. Instead oI coming to the rescue oI such
small organisations, the punishment is heavy. Employee's contribution does
not qualiIy Ior deduction u/s 88! The employer's contribution and interest
thereon are brought to tax as proIits in lieu oI salary in the year when the
payment is made. Interest on employee's own contribution is taxable u/s 56
as Income Irom Other Sources.This is a typical case oI the lawmakers not
being in contact with reality. They have created a no-win situation Ior small
entrepreneurs. They should have Iorced the Commissioner to accept
establishments having even one employee or provided an alternative by
allowing MFs or LIC to cater Ior such situations.Tax Planning:NotiIication
P592 F No. 142/27/94-TPL has empowered the trustees oI a provident Iund
to permit any time, within 12 months beIore the date oI retirement on
superannuation oI an employee, the withdrawal oI up to 90 oI the amount
standing to the credit oI the employee. There is no limit on the quantum oI
voluntary contributions made by an employee to his provident Iund. It
would be a good idea to contribute up to your maximum capacity a Iew
years prior to the retirement. The Iunds can be made available by taking
recourse to the withdrawals, iI necessary.


Gratuity: Section 10(10 III)

ny death-cum-retirement gratuity received under the pension rules (or any similar
scheme) by employees oI central or state government, any local authority or
deIence and civil services is wholly exempt. Gratuity received under the Payment
oI Gratuity ct, 1972 is exempt up to a limit oI gratuity paid at the rate oI 15 days
(last drawn) salary per year oI completed service or part thereoI in excess oI 6
months or Rs 3,50,000 whichever is less, provided the employee has put in
continuous service oI 5 years. In the case oI employees oI other statutory
corporations and employees in the private sector to whom the Payment oI Gratuity
ct is not applicable, the exempt amount would be the least oI the Iollowing:
1 ctual amount oI gratuity.
2
HalI month's salary Ior number oI years oI service calculated on the basis oI
average salary Ior the last 10 months.
3 Rs 3,50,000.

Salary includes D iI the terms oI employment so provide but excludes all other
allowances, bonuses, commissions and perks. The payment oI gratuity, while the
employee is still in service, does not qualiIy Ior any exemption. Gratuity received
Irom a previous employer will be pooled with gratuity received Irom the present
employer Ior computation oI the exempt limit.



Superannuation Fund (SAF)

During the tenure oI service, employees at higher income level would be required
to pay heavy taxes on their bonus income. Superannuation Fund (SF) enables the
employers as well as employees to save income tax on such bonuses. The only
restriction is that any excess over 27 oI salary contributed by the employer to PF
and SF put together will not be allowed as deduction (NotiIication 10507 dated
16.1.98 w.r.e.I. 22.9.97).

The trustees oI the Iund shall enter into a scheme oI insurance with any insurer oI
liIe right Irom the start. lternatively, they shall accumulate the contributions and
interest thereon. With this amount, they shall purchase an annuity Irom the
insurance company at the time oI retirement (or prior death) oI the employee, at or
aIter a speciIied age, or on his becoming incapacitated prior to such retirement.

t that juncture, the employee may be paid a commuted value not exceeding one-
third oI the corpus where the employee receives gratuity and halI otherwise. This
commuted amount is tax-Iree.

The Ireedom Irom income tax is not enjoyed iI the employee resigns (not retires)
or the employee retires beIore the superannuation age. The escape route in such
cases is to purchase SF-related annuity with the entire balance to the credit oI
SF, without any commutation.

For grant oI exemption Irom tax, rule 89(ii) oI IT provides that annuities shall be
purchased Irom liIe insurance companies only. The employee has a wide choice
between diIIerent annuities.
Since this annuity has its nexus with salary oI the employee, prior to his retirement,
he can claim the standard deduction thereon.



Pension: Section 10(10A)

ny payment in commutation oI pension received under the Civil Pension
(Commutation) Rules oI the central government or under any similar scheme
applicable to the members oI the civil services oI the union, or civil posts under a
state, or to the members oI the all India Services and deIence services, or to the
employees oI a local authority or a corporation established by a central, state or
provincial ct, is exempt.

s regards any other employees, it is exempt up to one-third oI the pension where
the employee receives any gratuity and one-halI oI such pension otherwise.

The standard deduction is available to pensioners as well.


Leave Encashment: Section 10(10AA)

Encashment oI privilege leave not availed oI during the tenure oI employment is
taxed as salary. However, leave salary paid to legal heirs oI a deceased employee is
not liable to tax.

Cash equivalent oI leave salary payable to a government employee in respect oI
leave to his credit at the time oI his retirement on superannuation or otherwise, is
Iree Irom tax.

For other employees, this exemption is subject to the least oI-
a 10 months average salary (calculated on the basis oI the salary during 10
months preceding the employees' retirement on superannuation or otherwise).
b Cash equivalent oI leave salary in respect oI the period oI earned leave
standing to the credit oI the employee. Earned leave cannot exceed 30 days Ior
every year oI actual service rendered Ior the employer Irom whose service he
has retired.
c The amount oI leave encashment actually received.
d Rs 3 lakhs (NotiIication 123/2002 dated 31.5.02).


Where an employee has encashed leave in one or more years Irom more than one
employer, the total amount exempt in this regard is subject to the above ceiling.

The phrase 'retirement on superannuation or otherwise' has caused a lot oI
conIusion and consequent litigation. I hope the authorities deIine the meaning oI or
otherwise unambiguously, or otherwise ITOs will continue to interpret the same
diIIerently.

In respect oI leave encashment, CIT v Malhotra 142CTR325 (Bom) has observed,
"On acceptance oI resignation, the employee stands retired Irom service. The word
'retirement' has not been used in the restricted sense to mean 'retirement on
superannuation'. On the other hand it is clear that it has been used in the widest
possible terms to mean and include all cases oI retirement, whether on
superannuation or otherwise. What is relevant is 'retirement'. How it took place is
immaterial Ior the purpose oI the clause. It is thereIore clear that on retirement,
even on resignation, the employee will be entitled to the beneIit oI the exemption."

UnIortunately, some oI the ITOs adopt their own views wherever it is convenient
Ior them to do so.



Retrenchment Compensation: Section 10(10B)

Compensation received by a workman is exempt up to the amount calculated in
accordance with Sec 25(b) oI the Industrial Disputes ct 1947, or Rs 5 lakhs,
whichever is less.

Voluntary Retirement Scheme: Section 10(10C)

VRS compensation received by an employee at the time oI his voluntary retirement
in accordance with prescribed guidelines is exempt up to Rs 5 lakhs. DiIIerent
schemes can be Iramed Ior diIIerent classes oI employees but within the
guidelines.

Now comes a peculiar problem. candidate accepting VRS may suddenly Iind
that his normal salary earned up to the retirement, when added to the taxable
portion oI VRS makes his income under the head Salaries over Rs 5 lakhs and
thereIore, he loses the rebate u/s 88. The standard deduction also goes down Irom
Rs 30,000 to Rs 20,000.

Following are the guidelines:
1 It applies to all employees, including workers and executives (but not
directors), who have completed 10 years oI service or completed 40 years
oI age.
2 Where such exemption has been allowed any time in the past, no
exemption shall be allowed in any other subsequent year.
3 The vacancy caused is not to be Iilled up, nor is the retiring employee to be
employed in another company or concern belonging to the same
management. VRS should result in overall reduction in the existing
strength oI the employees.
4 VRS beneIit should not exceed either (i) 3 months' last drawn salary Ior
each completed year oI service or (ii) salary at the time oI retirement
multiplied by the balance months oI service leIt beIore the date oI his
retirement on superannuation. Note the absence oI 'whichever is more' or
'whichever is less'. One oI the two conditions should be satisIied Ior the
eligibility oI the exemption. Salary includes D, iI the terms oI
employment so provide, but excludes all other allowances and perquisites.
5 Where this exemption has been allowed to any employee Ior any year, it
shall not be allowed to him Ior any other year.
6 The exemption up to Rs 5 lakhs is available on the entire VRS amount,
even iI paid in instalments in diIIerent years.

Under such a situation-

U/s 15, the entire compensation paid or accrued under the VRS becomes
chargeable to tax during the very Iirst year.

U/s 192, "TDS on income under the head 'Salaries' at the average rate oI income
tax computed on the basis oI the rates in Iorce Ior the FY in which the payment is
made, on the estimated income oI the assessee under this head Ior that FY."

Yes, Sec 192 requires TDS to be computed on payment made Ior the year whereas
Sec 15 makes the entire compensation paid or accrued as an income chargeable to
tax.

There appears to be an apparent contradiction between the two sections. The issue
is resolved by YSC Babu & nother v Chairman & Managing Director, Syndicate
Bank & Others (2002) 173CTR151 (P). The learned judge correctly observed,
"The intention oI the legislation is that it is necessary to arrive at the average oI the
income tax payable on the estimated income Ior the FY during which the Iirst
instalment is paid on the basis oI the rates in Iorce and thereaIter, deduct the tax
payable only on the amount paid during the year.

"s provided u/s 192, the income oI every employee has to be estimated under the
head Salaries Ior the FY in question and thereaIter, give eIIect to the exemptions
that are available not only u/s 10(10C) but also under any other provisions oI the
ct, such as the standard deduction and rebate u/s 88, etc. Several exemptions
provided under the ct have to be cumulatively applied while computing the
annual income and not with reIerence to a particular payment. ThereaIter, one has
to compute the average income tax on the basis oI the rates in Iorce Ior the FY.
TDS has to be eIIected 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 oI such
payment.

"Consequently, as and when the subsequent instalments are paid, tax on these
incomes has to be computed by applying the rate oI tax thus arrived at.
Exemptions, deductions and rebates can be claimed thereon as provided by the
ct."

U/s 35DD(1), amortisation oI expenditure incurred under VRS is allowable to the
employer in Iive equal instalments in respect oI the amount paid (including
payable, as per strict interpretation). ThereIore, the employers will Iind it useIul to
spread the cash outIlow arising out oI VRS over a period oI 5 years. ny interest
paid to the employee on the periodical instalments received subsequently, will be
directly a charge to proIits and gains oI the business Ior the previous year during
which the interest is paid.

The employee will also Iind this arrangement useIul because oI two distinct
reasons. The Iirst is that he does not have to suIIer the entire tax upIront at the
prevailing rates but be subjected to TDS as and when the instalments are paid.
Moreover, he gets rewarded by way oI interest at a rate much higher than the
market rate and Irom a very saIe source, his erstwhile employer.



Miscellaneous

Besides the above beneIits, some employers give retirement beneIits in the Iorm
oI:
1 Insurance annuity policy in appreciation oI outstanding services rendered. The
annuity payments are payable to the employee or his heirs. The payments
commence aIter retirement or prior death oI the employee.
2 Medical assistance to the retired employee and his wiIe as well as dependent
children.
3 ny ex-gratia received on termination oI service need not be treated as proIit
in lieu oI salary within the meaning oI Sec 17(3), iI the employer was under no
obligation to make the payment.




RELIEF U/S 89(1)

The various terminal beneIits received by an employee are bound to push the
income onto a substantially higher tax slab. similar situation arises when the
salary is paid in arrears or in advance. To mitigate the hardships caused to the
assessee by such situations, ITOs are empowered to grant appropriate relieI u/s
89(1), on receipt oI an application Irom the assessee. However, u/s 192(2),
government servants or employees in companies, co-operative societies, local
authorities, universities, institutions, associations or bodies may Iurnish the
particulars in Form 10E and get the relieI directly Irom the employer.

II leave encashment is received during employment, it is chargeable to tax,
irrespective oI whether the employee is in government or private service. The
employee can, however, claim relieI in terms oI section 89 (Circular 431, dated
12.9.85).



Salary in Arrears or in Advance Rule 21A(2)]

The relieI on salary received in arrears or in advance is computed in the manner
laid down in rules 21 and 21 as Iollows:
a Calculate the diIIerence between the taxes payable oI the relevant previous
year in which the additional salary is received on the total income, excluding
the additional salary and including it.
b Calculate the diIIerence between the taxes payable on the total income aIter
excluding the additional salary and including it in the previous year to which
such salary relates.
c The amount oI relieI admissible u/s 89 - B. No relieI is admissible iI ' -
B' is negative. II the additional salary relates to more than one previous year,
salary would be spread over the previous years to which it pertains in the
manner explained above.


ll these computations are to be carried out by taking cognisance oI the rebate u/s
88, 88B or 88C to the extent applicable. The Iact that the assessee would have
contributed additional money to such avenues has to be ignored. Surcharge has to
be applied on the tax payable aIter rebates Ior respective years.

Family pension received in arrears by Iamily members oI a deceased employee is
also eligible Ior beneIit oI Sec 89(1) w.e.I. FY 95-96.

Finally, application oI Sec 89(1) to VRS.

Madras high court in the case oI CIT v M. Raman, bdul Hadi and NV
Balasubramanian JJ, (ITR vol 245, 2000) decided on 4.3.1997 that- The amount
received by the employee at the time oI voluntary retirement oI service would be
regarded as salary and the relieI under section 89 oI the Income Tax ct, 1961,
would be admissible in respect oI such sum.

"The assessee has taken voluntary retirement Irom the service and received an
amount oI compensation at the time oI his voluntary retirement. The question that
arises is whether the compensation received by the assessee at the time oI
voluntary retirement would Iall within the provisions oI section 17(3)(i) oI the
Income Tax ct, 1961, that is, whether it can be regarded as salary and the
assessee would be entitled to the relieI provided u/s 89 oI the Income Tax ct,
1961. This court in the case reported in CIT v. J Visalakshi (1994) 206 ITR 531,
held that iI an employee receives at the time oI resignation, the amount could be
regarded as salary and the assessee would be entitled to the relieI provided u/s 89
oI the Income Tax ct, 1961. The said principle rendered by this court in the case
oI resignation would equally apply to the case oI voluntary retirement oI an
employee Irom service."

The method oI computing the relieI is described under the subhead, 'Compensation
on Termination' subsequently.



Gratuity Rule 21A(3)]

RelieI can be claimed u/s 89(1), iI gratuity is received in excess oI the limits
speciIied in the ct. However, no relieI is admissible iI taxable gratuity is in
respect oI services rendered Ior less than 5 years. How relieI is computed is
discussed below.

II service is Ior 15 years or more-
a Compute average rate oI tax on the total income, including the gratuity in the
year oI receipt.
b Compute tax on gratuity at this rate.
c Compute average rate oI tax by adding one-third oI the gratuity to the other
income oI each oI the 3 preceding years.
d Take average oI the 3 rates computed in the manner speciIied in 'C' above and
compute the tax on gratuity at that rate.


The relieI admissible u/s 89(1) B - D.

II service is Ior 5 years or more but less than 15 years-

The relieI is computed on similar lines. The only diIIerence is that instead oI
average oI the average rates oI the preceding 3 years, the average oI the rates oI the
preceding 2 years is computed by adding halI oI the gratuity to the other income oI
each oI the preceding 2 years.



Compensation on Termination Rule 21A(4)]

II the service is continuous Ior not less than 3 years and the unexpired term oI
employment is not less than 3 years, the relieI oIIered is as iI the gratuity was Ior
service oI 15 or more years.

Commutation of Pension Rule 21A(5)]

RelieI can be claimed in respect oI payment in commutation oI pension in excess
oI the limits mentioned in the ct. Such relieI is computed in the same manner as
iI the gratuity was paid to the employee Ior service oI 15 years or more.
Retirement Pension Scheme
Definition
Retirement pension is the beneIit granted to the scheme members that, having met
the qualiIying conditions, cease to be civil servants / employees.
Retirement can be due to:
O Lmployees requesL when he meeLs Lhe volunLary reLlremenL quallfylng
condlLlons
O ulsablllLy
O Age llmlL
O Speclal regulaLlons
Entitlement to a retirement pension depends on a period oI membership oI 5
years minimum.
Retirement can either be claimed by the member - voluntary retirement -, or
imposed by law (age limit) or by employer' decision - compulsory retirement.
Voluntary retirement can be qualiIied as early retirement.
Lnt|t|ement to ret|rement pens|on
retirement pension is granted when the scheme member meets one oI the
Iollowing conditions:
O 63 years of age and 13 years of servlce or unLll Lhe 31Lh uecember 2014
Lhe followlng age and Llme of servlce
1able l
ear Age 1|me of serv|ce
2010 62 years and 6 monLhs 23 years
2011 63 years 23 years
2012 63 years and 6 monLhs 21 years
2013 64 years 19 years
2014 64 years and 6 monLhs 17 years

O AL leasL 3 years of servlce (conLrlbuLory servlce wlLhln Luropean unlon or ln
orLuguese prlvaLe workers penslon scheme ls consldered for Lhls purpose)
and
4 Age llmlL (normally 70 years)
4 ermanenL dlsablllLy for work
4 unlshmenL wlLh Lhe penalLy of compulsory reLlremenL
4 CLher slLuaLlons sub[ecL Lo speclal reglmes
The scheme members that had, on the 31st December oI 2005, at least, 60 years oI
age and 36 years oI time oI service are allowed to retire whenever they want. The
scheme members aged less than 60 years that could retire during 2005 will
continue to be able to retire earlier.
n early retirement pension (voluntary type oI retirement) is granted when the
scheme member is, at least, 55 years old, as long as he had served 30 years until
his 55th anniversary.

ket|rement pens|on reg|me
The voluntary retirement pension not related to disability is granted according to:
O 1he pens|on scheme ru|es and Lhe member s|tuat|on (age sa|ary and t|me
of serv|ce) aL a parLlcular t|me chosen by the scheme member
or, iI no date is indicated in the retirement pension claim Iorm:
O 1he pens|on scheme ru|es aL Lhe Llme CGA rece|ves the ret|rement
pens|on c|a|m and Lhe member s|tuat|on aL Lhe Llme Lhe f|na| dec|s|on
concernlng Lhe reLlremenL penslon ls Laken
In the other situations, the retirement pension is granted according to the pension
scheme rules and the member situation at the time (scheme meaningful
moment):
O 1he scheme member reaches Lhe age llmlL (70 years)
O 1he scheme member ls found permanenL and LoLally unable for hls work by
CCA medlcal commlLLee
O 1he member ls punlshed wlLh Lhe penalLy of compulsory reLlremenL
Iter that moment, nor membership period or salary changes will be considered Ior
pension calculation (not scheme meaningIul).
Scheme mean|ngfu| [ob
The Iirst part oI the retirement pension (P1) oI the civil servants appointed beIore
1993-09-01 (related to the time oI service beIore 2006-01-01) is calculated upon
the last job the member has at the meaningIul moment, even iI the pensionable
remuneration is not its last month remuneration.
There are some situations in which the pensionable remuneration is:
O 1he average of penslonable remuneraLlon over Lhe lasL years (more Lhan
one [ob / poslLlon ln LhaL perlod)
O 1he average of penslonable remuneraLlon durlng Lhe lasL years (chlef
offlces or scheme members labour conLracLed)
The second part oI the retirement pension (P2) oI the civil servants appointed
beIore 1993-09-01 (related to the time oI service aIter 2005-12-31) and the whole
retirement pension oI those appointed Irom 1993-09-01 onwards are calculated
according to the rules that apply to private workers / Social Security pensions
(average oI pensionable remuneration during the entire career).
Method of ca|cu|at|on Crd|nary ret|rement
The key Iactors in determining the amount oI ordinary retirement pension are the
pensionable salary net of contributions to the pension scheme and the length of
time of service / membership (in years and complete months expressed in years),
limited to 36 years (members having, at least, 60 years oI age and 36 years oI
service during 2005 or only the membership length condition) or to the time of
service of Table II.
1able ll
ear 1|me of serv|ce
2010 3 years and 6 monLhs (33)
2011 39 years (39)
2012 39 years and 6 monLhs (393)
2013 40 years (40)
The scheme members that had, on the 31st December oI 2005, at least, 60 years oI
age and 36 years oI time oI service keep the Iormer pension method oI calculation.
Calculation formula: Pension (R x T) / 36
R MeaningIul remuneration (pensionable salary net oI contributions towards the
pension scheme)
T Years and complete months oI service expressed in years, with the maximum
oI 36
The meaningIul remuneration (R) is the sum oI:
A. Final monthly salary net oI contributions to the pension scheme at the
meaningIul moment or average oI the monthly salary net oI contributions towards
the pension scheme (please reIer to Scheme meaningful job); and;
B. verage oI the Iix permanent subsidiary bonuses paid over the last 2 years net
oI contributions towards the pension scheme.
The rest oI the civil servants appointed until 1993-08-31 will have the pension
calculated according to the Iollowing Iormula:
Calculation formula: Global Pension (P1P2) x FS
meaning
P1(R*T1)/Service oI Table II
R MeaningIul remuneration (pensionable salary net oI contributions towards the
pension scheme), like in the Iormer Iormula (salary until 2005 only);
T1 Years and complete months oI service until 2005-12-31 expressed in years,
limited to the values oI Table II
meaning
P2RR*T2*N
RRTR/(n*14)
TR highest remunerations related to the time oI service aIter 2005, limited to the
years necessary to have a Iull career (all the service beIore 2006 is taken into
account) (Table II)
n number oI civil years with contributions
T2 2 (until 2015-12-31) or between 2 and 2,3 (Irom 2016-01-01),
according to the value oI the remuneration
N number oI years (aIter 2005) with at least 120 days oI contributions necessary
to have a Iull career (all the service beIore 2006 is taken into account) (Table II).
FS sustainability Iactor
meaning
EMV 2006 / EMV year i-1
EMV 2006 liIe expectancy at age 65 years in 2006
EMV year i-1 liIe expectancy at age 65 years in the year oI retirement - 1
Absolut and general disability
II the scheme member is unable to perIorm not only his Job but any proIession, he
beneIits Irom more Iavourable rules, such as:
O ,lnlmum perlod of membershlp (enLlLlemenL condlLlon) of 3 years (lnsLead
of 3)
O enslon value aL leasL equal Lo Lhe mlnlmum penslon granLed Lo prlvaLe
workers wlLh Lhe followlng career
1able lll
ear Career (years)
2010 and 2011 21 Lo 30
2012 40
O 1he susLalnablllLy facLor ls noL Laken lnLo accounL ln Lhe penslon calculaLlon
unLll Lhe age 63 years (Lhe susLalnablllLy facLor ls never Laken lnLo accounL lf
Lhe pensloner ln LhaL momenL has been recelvlng a penslon for aL leasL 20
years slnce he was 43 years old)
Early retirement
The early retirement pension is calculated the same way the ordinary pension is.
The pension value thus obtained is then reduced 4,5 per year (Ior members that
had 36 years oI service in 2005-12-31) or 0,5 per month (Ior the other members)
the member needs to reach the retirement age (see Table I);
For instance, iI the scheme member could retire, normally, at age 62 years and 6
months (2010) and he is only 3 years and 1 day short to reach that age, the
reduction will be corresponding to 4 years (18 oI the total pension amount) and iI
he retires 1 day beIore he reaches 62 years and 6 months, the penalty will be
corresponding to 1 year (4,5).
II the scheme member is entitled to retire beIore reaching the age oI Table I (due to
special regulations), the reduction will take into account only the years and part oI
years needed to reach that special age limit.
The number oI years considered in the reduction oI the pension amount is itselI
reduced, until 2014, in one year Ior each period oI complete 3 years or in 6 months
Ior each complete year the member has completed above the time oI service oI the
Table II (members that had 36 years oI service in 2005-12-31) or in 12 months Ior
each period oI complete 3 years above 30 years oI service (at 55 years oI age)
(other members).
ens|on bonus
II the scheme member doesn't retire immediately aIter he meets the qualiIying
conditions, his pension will have a bonus.
That bonus corresponds to a given percentage oI the retirement pension, being
calculated according to the Iollowing Iormula: Pension x (Bonus 1 Bonus 2)
meaning
8onus 1 ,1 x 1
,1 number of
compleLe monLhs from
Lhe momenL LhaL Lhe
scheme member meL for
Lhe flrsL Llme Lhe
quallfylng condlLlons for
early reLlremenL
(wlLhouL reducLlons) and
Lhe momenL he reached
Lhe age of 1able l and 36
years of servlce (unLll Lhe
31Lh uecember 2014) or
63 years of age and 13
years of servlce (afLer
Lhe 31Lh uecember
2014)
1 063
8onus 2 ,2 x 2
,2 number of
compleLe monLhs from
Lhe momenL LhaL Lhe
scheme member
reached for Lhe flrsL
Llme Lhe age of 1able l
and 36 years of servlce
(unLll Lhe 31Lh uecember
2014) or 63 years of age
and 13 years of servlce
(afLer Lhe 31Lh
uecember 2014) and
reLlremenL llmlLed Lo hls
70Lh annlversary
2 ercenLage of 1able
lv
1able lv
ket|rement year Career (years) ercentage ()
unLll 2014
36 Lo 39 063
Cver 39 100
AfLer 2014
13 Lo 24 033
23 Lo 34 030
33 Lo 39 063
Cver 39 100
For bonus purposes, only eIective service aIter 2007-12-31 is taken into account.
The maximum value oI the boniIied pension is 90 oI the scheme member last
pay.
ens|on payment
Pensions are deposited in pensioners Bank accounts.
The pensioners living abroad can ask Ior the pension to be paid in their country oI
residence.
The annual pension payment schedule is established and made public available
(namely in www.cga.pt) in the beginning oI each year.
ens|on prescr|pt|on
Retirement pensions prescribe one year aIter the date they should have been paid.
II the pensioner does not withdraw its pensions Ior consecutive 3 years, the unitary
right to the pension will prescribe and he will loose the status oI retired / pensioner.