Scroll Top

search-icon
    drop-arrow

    Voluntary Retirement Scheme

    Introduction

    A Voluntary Retirement Scheme or VRS is a scheme that is offered by many companies to give employees the freedom to take voluntary retirement before they reach the age of retirement. As we know retirement is something that is associated with ageing, however, many individuals seek retirement at a much younger age. Voluntary retirement Scheme or VRS allows the employees to do just that. As far as companies are concerned, the primary goal to offer VRS to employees is to reduce some excess staff, save costs, and improve productivity.

    What is a Voluntary Retirement Scheme (VRS)?

    As the name clearly suggests, VRS or Voluntary Retirement Scheme is a scheme that is offered by companies to their employees wherein the employee can voluntarily end their period of service and take early retirement. Many times companies have to let go of employees for multiple reasons like cost-cutting and reducing the burden, in such cases offering VRS to the employees is a great way to ensure that while doing the necessary for the company, the employees are also benefited.

    In India, the average age of retirement usually is 58 to 60, however, with VRS an employee can seek voluntary retirement in their 40s. Whether it is to relax or to pursue some other interests, VRS can benefit both the employee and the company. The employee gets to enjoy post-retirement benefits while pursuing their interests while the company can reduce the excess workforce and increase productivity. This is why many companies today offer Voluntary Retirement Schemes or VRS. However, to avail VRS, the employee should be over the age of 40 years and should be working with the company for more than 10 years.

    How does VRS work?

    As discussed above, Voluntary Retirement Scheme or VRS can be availed by employees that have been working with the company for more than 10 years and are above the age of 40 years. This scheme that is offered by the companies can be availed by all employees of the company including executives, workers, and so on.

    When talking about the company, VRS benefits the company by reducing excess overload and reducing extra costs. Before a company offers VRS to its employees, it is required to take permission from the government. Another thing to consider by the company is the income tax rules under section 2BA.

    To avail of VRS from the company, one strict rule that is mentioned and to is followed is that the employee should not be working with any other company at the time.

    Objective of the Voluntary Retirement Scheme

    The primary objective of the Voluntary Retirement Scheme (VRS) is to provide benefits to both employees and companies. Employees that have worked with the company for a long service tenure can benefit from this scheme by taking voluntary retirement and ending their service tenure early so that they can enjoy the retirement benefits and pursue their other interests.

    How did VRS start in India?

    As already discussed above many companies often come across a situation where they need to cut down costs and let go of some employees. However, as per Indian law, direct retrenchment of employees is not allowed. In fact, the Industrial disputes act, of 1947 clearly states that employers and companies are not allowed to reduce the extra workforce by retrenchment. Trade unions are strictly against it. This is why the Voluntary Retirement Scheme or VRS was introduced in India.

    VRS solves the company’s problem of excess staff while also being beneficial to the employees. As this scheme is voluntary and not forced on the employees, VRS did not receive many objections or opposition from trade unions.

    Features of Voluntary Retirement Scheme (VRS)

    Now that we have seen what VRS or Voluntary Retirement Scheme is, let's go through some of its important features. These features must be understood by the employees before they can apply for VRS and are as follows:

    • In order to be eligible to avail of VRS, the employee should be more than 40 years of age and should have completed 10 years of service tenure with the company.

    • Once the employee applies for VRS and takes voluntary retirement, the company has to clear all due payments and the provident fund to the employee.

    • It is also the responsibility of the company to provide assistance to the employees in the form of tax consultation and counseling to ensure that they have a smooth retirement process.

    • When an employee retires through the VRS scheme, the company cannot fulfil that employee’s vacancy.

    • After opting for VRS, the employees can not join another organisation with the same management.

    • Employees can also receive compensation of up to 5 lakhs INR. this compensation is tax-free but to avail of this benefit the employee should apply for VRS in the same year as they get compensation.

    Who Can Avail Benefits Of VRS?

    As already discussed above, the company offering VRS and the employee that avails the VRS both can benefit from the scheme. Let’s see the voluntary retirement benefits availed by the employee and the company one by one.

    Benefits availed by the employee after Voluntary Retirement

    The benefits availed by the employee after Voluntary retirement are as follows:

    • The employee gets to enjoy retirement benefits at an early age.

    • The employee receives provident funds and gratuity dues.

    • The employee gets counselling and tax consultation from the company to get a smooth retirement.

    • The employee can also get tax-free compensation.

    • The employee can receive 45 days' payment for each completed year of service.

    Benefit for the company utilising this scheme

    The benefits that the company gets after utilising VRS scheme are as follows:

    • It helps the company in cost-cutting and reducing the workforce.

    • The money that has been saved in the process can be used to improve the productivity of the company.

    • The company is saved from the opposition of trade unions.

    • The company can let go of the employees in a healthy way without damaging their relationships.

    Eligibility criteria for a Voluntary Retirement Scheme (VRS)

    To avail Voluntary Retirement Scheme (VRS) the employee needs to fit the eligibility criteria. The eligibility criteria for Voluntary Retirement Scheme or VRS are as follows:

    • The employee should have been working with the company for more than 10 years.

    • The employee should be 40 years of age or above.

    • All employees of the company can avail of the Voluntary Retirement Scheme or VRS except for the directors.

    How is Compensation under a VRS calculated?

    We have already discussed how employees can get compensation on VRS. So how is this compensation calculated? The compensation on VRS or Voluntary Retirement Scheme is calculated based on the last drawn salary of the employee. So whatever compensation the company is offering would be equal to three months' salary for the employee for each year. The compensation can also be calculated by multiplying the employee's salary at the time of retirement by the remaining months of service before the actual retirement date of the employee.

    Conclusion

    So to conclude, Voluntary Retirement Scheme or VRS is a legal solution for companies to lay off excess workforce without causing any disadvantage to the employees. This is a scheme that benefits employers and employees and is considered to be the kindest and most practical way of reducing the excess workforce. The company offering the Voluntary retirement scheme and the employees availing it should all be aware of the voluntary retirement rules, features of the scheme, and the ways in which compensation is calculated to enjoy the benefits of this scheme.

    FAQs

    • What is VRS full form?

    The VRS full form is Voluntary Retirement Scheme.

    • What does VRS mean?

    VRS means Voluntary Retirement Scheme - it is a scheme that allows companies to offer a voluntary retirement to employees who have not reached the age of retirement so that they can cut operational costs during tough times.

    • What are the voluntary retirement rules for state government employees?

    Any Government employee can opt for voluntary retirement by filling out the VRS application form for state government employees. this needs to be done at least three months before the desired retirement date. It can only be done after the employee has finished 20 years of service, as long as there is no Departmental Enquiry pending /initiated against him/her.

    Popular Topics

    Latest Articles

    Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

    Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

    CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

    Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

    Cleartax is a product by Defmacro Software Pvt. Ltd.

    Company PolicyTerms of use

    ISO

    ISO 27001

    Data Center

    SSL

    SSL Certified Site

    128-bit encryption