VRS - Voluntary Retirement Scheme

Why VRS?

It can be two types either the employer feels that the employee is not adding any value because of the current trend and they may give GOLDEN Handshake and give VRS.

Condition: Employer may initiate VRS after completion of 30 years of qualifying service

Sometimes, the employee feel that they wanted to something on their own or their personal life is more important than working till the age of retirement. In both the cases VRS can happen

Condition: Employee can opt for VRS after completion of 20 years of qualifying service.

In a Public Sector or Private Sector companies employee can opt for 10 years of service and it is subject to approval of the employer.

Reasons for VRS

It is a technique used by companies for trimming the workforce employed and it is a common method to dispense the excess man power and improve the performance of the organization.

It is called Golden Exchange

1. Recession in Business

2. Downsizing

3. Realignment of business - due to market conditions

4. Joint Ventures with Foreign collaborations

5. Takeovers and mergers

6. Business re-engineering process

7. Product/Technology Obsolescence

Voluntary Retirement Scheme or The Golden Handshake scheme as is known commonly is another form of retrenchment by employer.

From point of view of employee:

1. Tax free lump sum payment.(Limited to Rs.500000)
2. Early retirement may give time to follow other vocations.
3. More time for family and peace of mind.

From point of view of employer:

1. Reduction in size of workforce, as the position which is once offered for VRS is never ever filled up again.
2. Considerable savings in long term although a huge ad hoc expense.
3. Excess workforce of employer in a department or the company as a whole reduced and only more productive and young people are left.

Conditions to be eligible for VRS:

1. Above 40 years of age or has completed 10 years of service.
2. Cannot join the same organisation or its subsidiaries ever again.

Computation of VRS:

Each company can frame its own scheme but it shall not be violating the norms of Rule 2BA of the Income Tax Act, which prescribes the following:

The payment shall be either of the two amounts computed as per the following ways.

1. Three months’ salary multiplied by number of completed years of service.
2. Monthly emoluments (salary) at the time of retirement multiplied by the number of months left for service.

Salary here will mean - Basic + DA + Commission based on fixed percentage of turnover

It is to be kept in mind that the maximum exemption limit is Rs. 5,00,000 only and if the payment under VRS exceeds this limit then the sum received over and above Rs.5,00,000 will be taxable.

How the Money can be invested

The money can be invested in 4 different instruments

1. Post office MIS: Jointly husband and wife can put 9 lakhs which gives 8.5% interest which is taxable and the lock in period of 5 years.
2. For VRS, the entry age is 55 years, others 60 years and it will fetch 9% quarterly compounding, and the investor can receive every quarter interest and paid as cash or direct credit, and the lock in period will be again 5 years and the interests are taxable.
3. Monthly Income Plan: In mutual fund Monthly Income Plan up to 20% of the investment is invested in an equity and the remaining 80% of the money is in a debt funds, which will earn around 9 to 10% post tax, lock in period is only one year, but if the individual consider this also like other investment tenure of 5 years then it is much more tax efficient and can generate 2% more returns.
4. Balanced Fund: Some port ion of the money can be invested and this investment is planned for 5 years plus, investor should not look for monthly pay out from the day one and instead if they allow it to grow for 5 years then they can start withdraw around 12% per annum. Depending on the risk the investor can allot the percentage for the same. For VRS their life time post retirement will be bigger than their working period, so this particular investment can’t be avoided.