EaseValueWhat Happened?
The Income Tax Appellate Tribunal (ITAT) Ahmedabad bench has allowed four appeals filed by BSNL (Bharat Sanchar Nigam Limited) employees who received Voluntary Retirement Scheme (VRS) compensation. The tribunal has confirmed that VRS compensation paid by BSNL qualifies for complete exemption under Section 10(10B) of the Income Tax Act 2025. The tribunal has directed the Assessing Officer to recompute the income of these four appellants and grant refunds if any tax was wrongly collected on the VRS amount.
Background & Legal Context
What is Section 10(10B)?
Section 10(10B) of the Income Tax Act 2025 (which retains the same provision from the Income Tax Act 1961) provides exemption for compensation received by an employee on termination of employment. This section covers:
- Voluntary Retirement Scheme (VRS) compensation
- Retrenchment compensation
- Severance payments
- Retirement benefits on termination of service
The exemption is limited to:
- ₹5,00,000 (Five Lakh Rupees) as a basic exemption limit, OR
- If less than ₹5 lakh, the actual compensation received is fully exempt
- Any amount above ₹5 lakh is taxable as income in the year of receipt
What Did the Tax Department Argue?
In these four cases, the Income Tax Department had taken the position that the VRS compensation received by BSNL employees was taxable income in the assessment year and attempted to include it in the employee's total income. The Department argued that either:
- The compensation did not qualify for exemption under Section 10(10B), OR
- Only a portion qualified for exemption, and the balance was taxable
The ITAT Ruling
ITAT Ahmedabad has rejected the tax department's position and held that:
- BSNL VRS compensation is a genuine termination benefit and qualifies for exemption under Section 10(10B)
- The compensation received was within or equal to ₹5 lakh (in these four cases), making it fully exempt from income tax
- The Assessing Officer wrongly included it in the taxable income
- Income must be recomputed by excluding the exempt VRS compensation
- Refunds must be processed if excess tax was deducted or paid
This ruling applies to Assessment Years 2025-26 and 2026-27 where similar cases are pending.
What Does This Mean for You?
For BSNL Employees:
If you received VRS compensation from BSNL and it was taxed by the Income Tax Department, this ruling is excellent news:
- Your VRS compensation up to ₹5 lakh is completely tax-free
- If the tax department had added this to your taxable income, you can now file a revised return or pursue the matter under the appeals process
- You are entitled to a refund of any tax wrongly paid or deducted on this compensation
- Interest paid on delayed refunds will also be calculated from the date of original payment
For Other Public Sector Employees:
This ruling is not limited to BSNL alone. Employees of other PSUs (Public Sector Undertakings) like Indian Railways, India Post, NTPC, Coal India, etc., who received VRS compensation, can rely on this judgement for their tax claims. The legal principle is the same across all employers.
For Private Sector Employees:
Section 10(10B) applies to all employees, whether in public or private sector. If you received VRS, retrenchment, or severance compensation up to ₹5 lakh, it is exempt. If your employer or the tax department challenged this exemption, you can now cite this ITAT ruling to strengthen your position.
Practical Impact on Assessment Years 2025-26 and 2026-27:
Going forward, when the tax department is processing returns where VRS compensation has been received:
- The tax department must grant the Section 10(10B) exemption automatically
- If a notice is issued asking to explain VRS compensation income, this ruling provides strong support for claiming exemption
- The burden on you (the taxpayer) to prove eligibility is significantly reduced
What Should You Do Now?
If You Are a BSNL or PSU Employee Who Received VRS:
- Check Your Assessment Orders: Review your last 3-4 assessment orders (AY 2023-24, 2024-25, 2025-26) to see if VRS compensation was included in your taxable income
- Gather Documentation: Collect the VRS compensation receipt/letter from your employer stating the exact amount received and the financial year of receipt
- Calculate Tax Wrongly Paid: Work out how much tax was paid on the VRS compensation (including any TDS deducted by employer)
- File Revised Return or Appeal: You have options:
- File a revised return under Section 139(5) if the return was filed incorrectly
- File an appeal if an assessment order was already passed
- Apply for refund claiming the excess tax was wrongly deducted
- Cite This ITAT Ruling: When filing any document, clearly reference this ITAT Ahmedabad ruling (dated October 2026) to support your claim
- Provide Full Details: Submit VRS compensation amount, year of receipt, name of employer, and tax deducted/paid
Timeline to Act:
Under the Income Tax Act 2025, you can claim refund for the last 5 assessment years (AY 2021-22 onwards). However, it is best to act immediately as:
- Evidence becomes stronger when fresh
- Interest accrues on refunds only from a certain date
- More BSNL/PSU employees may file similar claims, creating a backlog
Key Takeaways
- VRS Compensation is Exempt: ITAT Ahmedabad has confirmed that VRS compensation up to ₹5 lakh is fully exempt under Section 10(10B) of the Income Tax Act 2025
- Applies to All Sectors: While this ruling concerns BSNL, it applies to all employers (public and private) and all employees receiving VRS, retrenchment, or severance compensation
- Refunds Possible: If you were wrongly taxed on VRS compensation in past years, you are entitled to claim refund with interest
- Strong Legal Support: This ITAT ruling provides strong precedent. The tax department cannot arbitrarily reject Section 10(10B) exemption claims without valid reasons
- Act Now: Review your past returns immediately, gather documentation, and either file a revised return or pursue the appeals route to recover wrongly paid tax
Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602