Section 10(10B) BSNL VRS Compensation Exempt - ITAT Pune 2026

What Happened?

The Income Tax Appellate Tribunal (ITAT) Pune recently delivered a favourable ruling for BSNL employees who accepted the Voluntary Retirement Scheme (VRS) in 2019. The tribunal held that VRS compensation received by BSNL employees is eligible for complete tax exemption under Section 10(10B) of the Income Tax Act 2025. The ITAT set aside the earlier orders passed by the Commissioner of Income Tax (CIT(A)) and directed the income tax authorities to verify and process refunds due to affected employees.

Background & Legal Context

Section 10(10B) of the Income Tax Act 2025 provides tax exemption for retrenchment compensation or voluntary retirement scheme compensation paid by employers to employees. This section is a successor to the old Section 10(10B) under the Income Tax Act 1961, which continues to apply with the same principles.

The key provisions of Section 10(10B) are:

• Compensation received on termination of employment (either retrenchment or voluntary retirement) is tax-exempt
• The exemption applies to lump-sum payments made as part of VRS or severance packages
• The exemption is subject to certain limits and conditions specified in the section
• Amount cannot exceed ₹5 lakh per year of service (under old 1961 Act; Income Tax Act 2025 maintains similar framework)
• The payment must be genuinely for separation from employment, not arrears or bonus

In the BSNL VRS-2019 case, the initial assessment officer had rejected the Section 10(10B) exemption claim, treating the VRS compensation as taxable income. The CIT(A) upheld this view, arguing that the compensation could not qualify as retrenchment compensation because VRS is voluntary, not involuntary.

However, ITAT Pune disagreed. The tribunal observed that VRS compensation is explicitly covered under Section 10(10B) because the section specifically mentions both:

• Retrenchment compensation (involuntary separation)
• Voluntary retirement scheme compensation (voluntary separation)

The tribunal noted that the legislative intent behind Section 10(10B) is to provide relief to employees whose employment relationship with the employer terminates, regardless of whether the termination is voluntary or involuntary.

What Does This Mean for You?

For BSNL Employees:

• If you received VRS compensation in 2019, you may be entitled to a full refund of taxes paid on that amount
• The ITAT's ruling applies retrospectively, meaning employees who already paid income tax can claim refunds for AY 2019-20 and onwards
• You should not have reported VRS compensation as taxable income in your ITRs (Income Tax Returns) filed for relevant assessment years
• If you did report it as income, you can now file revised returns (ITR-U) or claim refunds based on this judgement

For Other Employees:

• This judgement sets a binding precedent for all VRS schemes across public and private sector organizations
• If you received VRS compensation from any employer, you are entitled to claim Section 10(10B) exemption
• The exemption applies regardless of whether your employer was a public sector unit (PSU) or private company
• Retrenchment compensation from any industry also qualifies for the same exemption

For Assessment Year 2025-26 and 2026-27:

• Any new VRS schemes announced by PSUs or retrenchment packages offered by private employers will now be exempt from income tax
• Income tax authorities must automatically allow Section 10(10B) exemption without questioning the legitimacy of VRS vs. retrenchment
• CITs and their deputies cannot reject Section 10(10B) claims based on the voluntary vs. involuntary distinction

Practical Impact:

If a BSNL employee received ₹50 lakh as VRS compensation and their salary was ₹5 lakh per month with 10 years of service, the exemption would be calculated as ₹50 lakh × (10 years / service period) minus any amount already exempted. The exact limit depends on individual circumstances, but the ITAT has confirmed that VRS compensation is not taxable income.

What Should You Do Now?

Immediate Actions for Affected Employees:

• Gather documents: Collect your VRS/retrenchment agreement, separation letter, and compensation statement from the employer
• Check if you filed ITR: Review your previous income tax returns (AY 2019-20 onwards) to see if you reported VRS compensation as taxable income
• File revised returns (ITR-U): If you reported VRS income, file corrected returns removing that income from your taxable income. You have up to 5 years from the end of the relevant assessment year to file revised returns
• Claim refund: If income tax was deducted at source (TDS) on your VRS compensation, claim a refund through your ITR
• Communicate with employer: If your employer deducted TDS, ask them to correct Form 16 if needed, though this may not be necessary as you can adjust it in your ITR
• Document the ITAT judgement: Keep a copy of the ITAT ruling. This serves as legal protection if the income tax department questions your exemption claim

If You Face Departmental Challenge:

• Cite the ITAT Pune judgement in your response to any income tax notice
• Emphasize that ITAT (being the appellate authority) has already decided that Section 10(10B) exemption is valid for VRS compensation
• The income tax officer cannot go against an ITAT judgement on the same set of facts

For Professional Guidance:

If you received a substantial VRS package or face income tax assessment, consult a CA to file your revised return accurately and claim all eligible exemptions and deductions.

Key Takeaways

• Section 10(10B) covers VRS compensation: Voluntary Retirement Scheme payments are tax-exempt under Section 10(10B) of Income Tax Act 2025, just like retrenchment compensation
• ITAT has set a binding precedent: The ITAT Pune ruling makes it clear that income tax authorities cannot deny Section 10(10B) exemption based on voluntary vs. involuntary distinction
• Refunds are available: BSNL employees (and others) who paid tax on VRS compensation can claim refunds for previous assessment years
• Applies across sectors: This ruling applies to VRS schemes of all employers—PSUs, private companies, and government organizations
• Act now: File revised returns if needed and claim your rightful refunds before limitation periods expire

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