Expenditure incurred on Voluntary Retirement Scheme

Introduction

If an employer pays any sum to an employee in accordance with any scheme of voluntary retirement, such amount is allowed to be deducted in five equal instalments in five successive years. The first instalment is deductible in the year in which such amount is actually paid to the employees.

1. About

1.1. What is voluntary retirement?

Voluntary retirement is an early retirement option given by an employer to its employees to take retirement before the decided age of retirement. To ensure social security for the retiring employees, employers provide ‘voluntary retirement compensation’ to its employees. Such voluntary retirement compensation is taxable in the hands of the employees as profit in lieu of salary.

1.2. How much deduction is allowed?

The compensation paid by the employer to an employee in connection with his voluntary retirement, under any voluntary retirement scheme, is deductible in 5 equal instalments in 5 successive years. The first instalment is deductible in the year in which such amount is actually paid to the employees. Each part of the payment in connection with voluntary retirement is deductible in 5 equal instalments in 5 years.

Where any deduction is claimed and allowed, in respect of the aforesaid expenditure, in this provision, no deduction is allowed in respect of such expenditure under any other provisions of this Act.

1.3. Deduction in case of business reorganization

If voluntary retirement compensation is made by predecessor and before completion of 5 years it is succeeded in a scheme of business reorganization (i.e., amalgamation, merger, conversion of firm or proprietary concern into company or conversion of company into LLP), the successor is entitled to claim the balance deductions over the remaining period of 5 years, beginning with the tax year in which such reorganization has taken place, as if the reorganization had not taken place. Accordingly, no deduction shall be allowed to the transferor in the year of transfer and in subsequent years.

However, in case of amalgamation or demerger of co-op. banks, the amount of deduction so determined shall be allowed to both, in the year in which amalgamation or demerger takes place, the transferor (amalgamating or demerged co-op. bank) and transferee (amalgamated or resulting co-op. bank) proportionately. In subsequent years, the transferee shall be entitled to claim the deduction for the unexpired period.

This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.