BSNL VRS Ex Gratia ₹14.79 Lakh Tax Exempt 2026 | ITAT Lucknow

What Happened?

The Income Tax Appellate Tribunal (ITAT) at Lucknow has recently ruled that an ex gratia payment of ₹14,79,424 received by a BSNL employee under the Voluntary Retirement Scheme (VRS) is completely exempt from income tax. This decision follows the well-established legal precedent set by the Madras High Court on similar BSNL VRS cases. The tribunal did not separately decide on leave encashment treatment in this ruling, though this remains an important consideration for other employees.

Background & Legal Context

What is VRS Ex Gratia?

When BSNL (Bharat Sanchar Nigam Limited) offered Voluntary Retirement Scheme, employees received two main components: (1) Statutory retirement benefits as per service rules, and (2) Ex gratia payment as a voluntary gesture. The ex gratia component is discretionary and not mandated by law.

Relevant Income Tax Act 2025 Sections:

• Section 10(10C) – Exemption for Gratuity (under IT Act 2025). This section provides relief for gratuity received by employees, though the scope and application varies based on whether payment is statutory or discretionary.
• Section 192 – Tax deduction at source (TDS) on employment income. Employers must normally deduct tax on retirement payments unless exempted.
• Old Section 10(10C) of Income Tax Act 1961 – The historical provision under which most BSNL VRS cases were decided before the 2025 Act came into force. Many assessments for AY 2024-25 and earlier still rely on this section.

Why This Case Matters:

The ITAT Lucknow decision is crucial because it clarifies that VRS ex gratia payments made by BSNL are not "salary" or "wages" in the traditional sense. They are one-time compassionate payments made outside the regular employment contract. The tribunal aligned with Madras High Court's interpretation that such payments deserve tax-neutral treatment as they represent a policy decision by the government to ease transition for voluntarily retiring employees.

Key Legal Principle:

The tribunal emphasized that ex gratia payments are qualitatively different from regular salary income. They are not compensation for work done but rather a onetime payment to assist employees transitioning out of service. This distinction is critical under both Income Tax Act 2025 and the earlier 1961 Act. The exemption applies because the payment is not "salary in the normal sense" and does not arise from the employment contract itself.

What Does This Mean for You?

If You Are a BSNL Employee Who Took VRS:

• Immediate Relief: If you received an ex gratia payment as part of your BSNL VRS package, you should not have paid income tax on it. If tax was deducted at source (TDS) by BSNL, you can file a claim for refund under Section 192 of Income Tax Act 2025 for the assessment year in which you received the payment.
• For AY 2024-25 and Earlier: Use the old Section 10(10C) provisions of Income Tax Act 1961 in your ITR filing and claim exemption. This ruling provides strong supporting authority.
• For AY 2025-26 Onwards: The framework under Income Tax Act 2025 now applies, but courts and tribunals have confirmed the exemption principle continues.
• Leave Encashment Separate Issue: This ruling does not separately address leave encashment. If you also received payment for unused leave on retirement, that requires separate analysis. Generally, leave encashment receives exemption under Section 10(10D) of Income Tax Act 2025 (subject to limits), but you must quantify it separately from the VRS ex gratia.

For Your Employer (BSNL/Government Entities):

• This ruling reinforces that ex gratia VRS payments should not be subject to TDS deduction. HR/Finance departments must ensure such payments are processed without tax withholding going forward.
• Documentary classification is critical: ensure payment is clearly marked as "VRS Ex Gratia" in Form 16/Form 16A, not as "salary" or "wages."

Practical Impact on Your Tax Filing:

If you filed your ITR and included VRS ex gratia in your income, you should file a revised return under Section 139(5) of Income Tax Act 2025 (formerly under 1961 Act) to exclude this amount and claim refund of any tax paid. The revised return can be filed within two years from the end of the relevant assessment year, subject to the statute of limitations.

What Should You Do Now?

Step 1: Check Your Retirement Payment Documents

• Locate your VRS offer letter and final payment advice from BSNL.
• Identify the exact amount received as "ex gratia" (separate from gratuity and other statutory benefits).
• Check if this amount was included in your ITR or if TDS was deducted.

Step 2: Review Your Compliance Status

• If you filed ITR including VRS ex gratia in income, you need to file a corrected/revised return.
• If TDS was deducted by BSNL, compile Form 16/16A and all payment evidence.
• Calculate refund due: TDS deducted minus zero tax liability on the VRS ex gratia amount.

Step 3: File Corrected Return or Amended Return

• Use Section 139(5) (Revised Return) if within the prescribed time limit.
• Claim refund of tax paid on VRS ex gratia amount.
• Reference the ITAT Lucknow judgment and Madras High Court precedent in the return notes.

Step 4: Keep Documentary Evidence

• Retain a copy of this ITAT ruling and Madras High Court judgment in your tax records.
• Maintain Form 16, offer letter, and payment advice for minimum 6 years (per Income Tax Act 2025 record retention requirements).
• Document the breakup of your VRS payment clearly showing ex gratia separately from leave encashment and gratuity.

Step 5: Consult a Tax Professional

Each BSNL VRS package is structured differently. The amount of ex gratia, gratuity, and leave encashment varies. A qualified CA or tax consultant should review your specific retirement payment structure to ensure proper tax treatment of each component.

Key Takeaways

• VRS Ex Gratia is Tax-Free: The ITAT Lucknow confirms that BSNL VRS ex gratia payments of ₹14,79,424 are exempt from income tax under both the 2025 Act and earlier legal precedent. This is not salary income but a one-time compassionate payment.
• Follow Madras High Court Precedent: This ITAT ruling follows established High Court jurisprudence, making it a strong authority for similar cases across India. Other tribunals are likely to adopt the same position for comparable ex gratia payments.
• Leave Encashment Handled Separately: This ruling does not combine the treatment of ex gratia with leave encashment. Leave payment requires separate analysis under Section 10(10D) of Income Tax Act 2025, which provides limited exemption (₹25 lakh or actual amount, whichever is lower, in most cases).
• Refund Opportunity for Past Years: If you paid tax on BSNL VRS ex gratia in previous assessment years (AY 2024-25 or earlier), you can file revised returns and claim refunds. The ITAT ruling provides strong justification for such claims.
• Important for Employer Processing: BSNL and similar government entities must ensure TDS is not deducted on ex gratia payments. If deducted, it should be reversed in Form 16. Employees should request correction if TDS was wrongly withheld.

Disclaimer: This analysis is based on the ITAT Lucknow ruling of October 2026 and applicable Income Tax Act 2025 provisions. Tax treatment depends on specific facts of each case, including the exact nature and amount of payment. Employees with pending assessments or pending refund claims should seek personalized expert advice.

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