Tax cap of Rs 5 lakh imposed on BSNL, MTNL VRS compensation

The Central Board of Direct Taxes (CBDT) has capped tax exemption at Rs 5 lakh for employees who availed of voluntary retirement schemes offered by Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) in 2019.

The directive clarifies that employees who voluntarily exited under the scheme cannot claim the higher tax exemptions typically available for retrenchment compensation. Under the 2019 voluntary retirement scheme, participating employees were offered severance packages that exceed standard gratuity entitlements.

The tax treatment distinction between voluntary retirement and retrenchment has significant financial implications for affected employees. While retrenchment compensation receives more favorable tax treatment under income tax provisions, voluntary retirement schemes are subject to different classification rules, resulting in lower exemption limits.

The CBDT's decision affects thousands of telecom employees who opted for early exit during the 2019 VRS window. The Rs 5 lakh cap applies to the tax-free portion of their retirement benefits, with any amount above this threshold liable to income tax at applicable rates.

Both BSNL and MTNL had offered the voluntary retirement schemes as part of workforce optimization initiatives. The tax ruling is expected to impact the net benefits received by scheme participants when filing their income tax returns for the relevant assessment years.