The world today is very different from what it used to be before. Retirement that was often associated with aging and bad health is now being chased after by people in their 40s. More and more people are now thinking of taking up the voluntary retirement scheme as companies offer it to employees to reduce overall strength, save costs, and improve productivity.

Here are some things to note about the voluntary retirement scheme.

What is voluntary retirement?

Generally, the retirement age is considered to be 60 years. When a person crosses this milestone, they can retire from work obligations and spend the golden years of retirement pursuing their hobbies and interests. However, in the case of voluntary retirement, a person retires in their 40s or 50s.

What is the voluntary retirement scheme?

The voluntary retirement scheme is used by organisations as a way to cut down the number of employees. It is also referred to as the golden handshake and is a cordial way for companies to let go of some of their employees. Many big enterprises from the private and public sector resort to the scheme. However, in order to make sure that no company misuses it, the Industrial Disputes Act of 1947 mandates certain stipulations that all organisations must follow under the voluntary retirement scheme.

It is essential to note that even though the method is used as a way to decrease the workforce, the scheme differs from a regular termination. The final decision to opt for voluntary retirement lies with the employee. An employee who has worked with a company for a minimum of 10 years and is over the age of 40 can also apply for VRS.

What are the features of voluntary retirement scheme?

Here are some highlights of the scheme:

  • The scheme offers the employee their provident fund (PF) as well as gratuity.
  • The compensation paid to the employee is tax-free up to a prescribed amount.
  • The employee can opt for benefits such as counselling, rehabilitation, etc. to facilitate a smooth transition into retirement.
  • The scheme is predominantly used by public and private sector companies.

What are the criteria for voluntary retirement scheme?

To be eligible for this scheme, the following criteria must be met:

  • The employee should be at least 40 years old.
  • The employee should be working with the company for at least 10 years.
  • The scheme can be applicable to all employees of a company. The only exceptions are directors of a company or a co-operative society.

How is the compensation for voluntary retirement scheme calculated?

The compensation for voluntary retirement is calculated on the last drawn salary of an employee. The payment offered by the company is equivalent to the employee’s three months’ salary for each completed year of service or the employee’s salary at the time of retirement is multiplied by the remaining months of service left before the original date of retirement. In the case of public sector banks, the compensation is calculated based on 45 days of salary for every year of service or the salary for the remaining period, whichever is lower.

What are the rules for voluntary retirement scheme?

When it comes to voluntary retirement, there are some rules that need to be followed, such as:

  • Voluntary retirement is used as a way to reduce the total workforce of a company. Therefore, the company cannot hire new people in the place of the old employees who retire.
  • The employees who opt for voluntary retirement cannot take up a job with the same company, its management, or a sister concern. However, they can work elsewhere if they prefer.

What are the benefits of voluntary retirement scheme?

Voluntary retirement scheme offers a host of benefits for the company as well as the employee. For instance:

  • It is a simple, effective, and empathetic way to let go of employees and reduce the workforce strength of an organisation.
  • Since the human resource team of the company has to convince the trade unions about the need for implementing voluntary retirement, the process is transparent with no discrepancies. The scheme is also voluntary, so there are no objections from the trade unions either.
  • Voluntary retirement can reduce the company’s overall costs. When payroll costs are lowered, the money can be directed to several other operations to boost productivity.
  • The company provides rehabilitation like training to impart new employability skills to their employees. This helps them get another job in the future.
  • As the rules and regulations of the scheme have been clearly indicated under the Industrial Disputes Act of 1947, there are no inconsistencies in the process and both the employee and the employer benefit from it.

To sum it up

The voluntary retirement scheme is one of the most humane ways of reducing the total number of employees in an enterprise. It is beneficial for the company and helps the employee embark on a new phase of their lives with financial ease. However, it is important to know how the compensation is calculated to ensure that one knows what they are getting into.

1. How does VRS work?

Voluntary Retirement Scheme (VRS) is an initiative that companies use to reduce their workforce by asking the employees to retire earlier. The normal retirement age in India is between 58 to 60 years. However, employees who have completed ten years of service or are above 40 years may retire by opting for VRS. Also, these employees should voluntarily agree to retire.

Employees are protected under The Industrial Disputes Act, 1947, so they cannot be forced into retirement unless they want to.

2. Who can avail benefits of VRS?

The employees of a company who want to avail of the benefits of Voluntary Retirement Scheme in India must meet the following criteria:

  • The employee must be at least 40 years of age
  • The employee must have completed a minimum of ten years of service with the company
  • The option is applicable to all employees, except the directors of a company or a co-operative society

3. Is VRS taxable?

Any amount received or receivable by an employee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company as referred in the Act, a scheme of voluntary separation, to the extent such amount does not exceed five lakh rupees.

4. What is the difference between VRS and resignation?

Voluntary retirement scheme

  • VRS is an agreement between the company and the employee, where the employee chooses to retire voluntarily
  • Employees must be above a certain age and must have completed a certain number of years in the company to opt for VRS
  • Voluntary retirement scheme benefits include tax* benefits on the compensation


  • Resignation is the voluntary act of leaving an organisation
  • Employees can resign at their discretion at any age, regardless of how long they have been with the company
  • Tax benefits are not available to employees if they decide to resign

5. Can VRS be rejected by the employer?

Yes, according to a 2013 Supreme Court ruling, the decision of whether an employee can retire under VRS is at the discretion of the employer. This gives employers the authority to accept or reject an employee's request for voluntary retirement.

6. Will you get a pension after availing of VRS?

An employee opting for voluntary retirement is eligible to receive their Provident Fund (PF) and gratuity, along with a compensation.



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* Tax benefits may be available as per prevailing tax laws. Tax benefits under the policy are subject to prevailing conditions and provisions of the Income Tax Act, 1961. Goods and Services Tax and Cesses, if any, will be charged extra as per applicable rates. The tax laws are subject to amendments made thereto from time to time. Please consult your tax advisor for details
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