EaseValueWhat Happened?
The Income Tax Appellate Tribunal (ITAT) has recently condoned an exceptionally long delay of 1,659 days and allowed the exemption under Section 10(10B) of the Income Tax Act 2025 for compensation received by BSNL employees under the Voluntary Retirement Scheme (VRS) announced in 2019. This decision aligns with earlier coordinate bench rulings on the same issue, providing clarity and relief to affected employees across India.
The tribunal's order is significant because it settles a longstanding dispute about the tax treatment of VRS compensation in the telecom sector. The ruling effectively permits BSNL and other public sector undertaking (PSU) employees who received VRS payments in 2019 to claim exemption on such amounts, thereby reducing their taxable income substantially.
Background & Legal Context
Section 10(10B) of the Income Tax Act 2025 (previously Section 10(10B) under the Income Tax Act, 1961) provides exemption for compensation or gratuity received by an employee on termination of employment due to voluntary retirement scheme or other similar schemes approved by the Government.
The relevant conditions under Section 10(10B) are:
- The employee must receive compensation under a VRS or similar government-approved scheme
- The compensation must be a lump-sum amount, not recurring payments
- The amount should not exceed the amount specified or prescribed by the government
- The scheme must be formally approved by the appropriate government authority
- The employee's employment must be terminated as per the scheme's terms
The BSNL VRS-2019 scheme was officially approved by the Government of India as a restructuring measure to address surplus staff in the telecom sector. Employees who opted for this scheme received compensation packages including basic pension, gratuity, and severance allowance.
Why was there confusion? Several tax authorities initially denied the exemption, arguing that the compensation components did not strictly meet the criteria. This led to prolonged litigation. However, the tribunal's decision now confirms that the entire VRS compensation package qualifies for exemption under Section 10(10B).
What Does This Mean for You?
If you are a BSNL employee who received VRS-2019 compensation:
- Full Tax Exemption: You can now claim the entire VRS compensation amount as exempt from income tax under Section 10(10B). This applies to your assessment year filings, including AY 2025-26 and AY 2026-27 onwards.
- Reduced Tax Liability: If you had paid tax on this amount in earlier years (AY 2019-20, 2020-21, 2021-22, etc.), you may file a revised return or pursue a rectification petition to claim refunds, subject to applicable limitation periods.
- No Impact on Other Income: This exemption applies only to VRS compensation. Your other income (pension, interest, dividends) will still be taxable as per normal rules.
- Relief for Late-Filers: The tribunal's decision to condone the 1,659-day delay means that even if your appeal or claim was technically delayed, it may still be accepted, provided the underlying facts support the exemption.
If you are from other PSUs (like NTPC, Coal India, etc.): Although this ruling is specific to BSNL, the principles laid down apply equally to similar VRS schemes offered by other government undertakings. You should evaluate your VRS compensation against these criteria and claim exemption if eligible.
For employers/HR departments: This ruling simplifies compliance. BSNL and other PSUs can now clearly communicate to employees that VRS compensation is tax-exempt and need not be withheld at source (TDS) in full. However, proper documentation of the scheme's government approval is essential during tax audits.
What Should You Do Now?
Step 1: Verify Your Eligibility
Check whether you received VRS compensation under a government-approved scheme in 2019 or later. Obtain the scheme notification and your appointment letter for reference.
Step 2: Review Past Returns
If you filed income tax returns for AY 2019-20 onwards and included VRS compensation as taxable income, you should consider filing a revised return or rectification application under Section 139(5) of the Income Tax Act 2025. The revision must be filed within three years from the end of the relevant assessment year.
Step 3: Claim Exemption in Future Returns
For ongoing assessments (particularly AY 2025-26 and AY 2026-27), explicitly claim the exemption under Section 10(10B) in your ITR. Maintain supporting documents including the scheme notification, VRS payment receipts, and any communication from your employer regarding the scheme's approval.
Step 4: Preserve Documentary Evidence
Keep all relevant documents safe:
- Original VRS payment advices or salary slips showing the breakup
- Government order or board resolution approving the VRS scheme
- Communication from your employer/BSNL regarding the scheme
- Bank statements showing receipt of the amount
Step 5: Respond to Tax Notices Promptly
If the tax authority challenges your claim, reference this tribunal decision and cite the legal principle established. Consider filing a response within the prescribed 30 days to avoid penalty under Section 271(1)(c).
Step 6: Seek Professional Guidance
Given the complex nature of tax disputes, especially if you have already paid tax or received a demand notice, consult a tax professional before taking further steps.
Key Takeaways
- Section 10(10B) Exemption Confirmed: BSNL VRS-2019 compensation is fully exempt from income tax under Section 10(10B) of the Income Tax Act 2025, as per the recent ITAT ruling (August 2026).
- Condonement of Delay: The tribunal has condoned a 1,659-day delay, setting a significant precedent for allowing belated claims when the underlying facts support the exemption.
- Coordinate Bench Support: This decision follows earlier bench rulings, indicating judicial consensus on the exemption, which strengthens its legal standing.
- Revision Opportunity: Employees who paid tax on VRS compensation in earlier years should file revised returns within three years to recover the amount paid.
- Applies Beyond BSNL: The principles are equally applicable to VRS schemes of other PSUs, provided they meet the government-approval and scheme-criteria requirements.
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