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Rule 20Published

Rule 20: Voluntary retirement scheme conditions

Rule 20 sets conditions for qualifying voluntary retirement or voluntary separation schemes for the deduction under section 19, Table serial number 12. Eligibility of the employer, scheme design and the payment calculation must all be reviewed.

Official notified Income-tax Rules, 2026

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Rule 20 - Procedure for purposes of section 19 [Table: Sl.No.12] relating to voluntary retirement or voluntary separation

(1) Subject to the conditions specified in sub-rules (2) and (3), the amount received at the time of voluntary retirement or voluntary separation can be claimed as deduction for the purposes of section 19 [Table: Sl.No.12] by an employee of— (i) a public sector company; or (ii) any other company; or (iii) an authority established under a Central Act or State Act or Provincial Act; or (iv) a local authority; or (v) a co-operative society; or (vi) a University established or incorporated by or under a Central Act or State Act or Provincial Act, and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or (vii) an Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961); or (viii) an institution, having importance throughout India or in any State or States, as the Central Government may, by notification in the Official Gazette, specify in this behalf; or (ix) such other institute of management as the Central Government may, by notification, specify in this behalf.

(2) The deduction under sub-rule (1) is allowable only if the scheme of voluntary retirement framed by the aforesaid company or authority or co-operative society or University or institute, as the case may be, or if the scheme of voluntary separation framed by a public sector company, (herein referred to as ‗the scheme‘) is in accordance with the following requirements:– (i) the scheme applies to an employee who has completed ten years of service or completed forty years of age; (ii) the scheme applies to all employees (by whatever name called) including workers and executives of a company or of an authority or of a co-operative society, as the case may be, excepting directors of a company or of a co-operative society; (iii) the scheme has been drawn to result in overall reduction in the existing strength of the employees; (iv) the vacancy caused by the voluntary retirement or voluntary separation is not to be filled up; (v) the retiring employee of a company shall not be employed in another company or concern belonging to the same management; and (vi) the amount receivable on account of voluntary retirement or voluntary separation of the employee does not exceed either A or B, where,– A= 3*N*S; B = M*S; and N= Number of completed years of service; M = balance months of service left before the date of his retirement on superannuation; S= salary at the time of retirement.

(3) In case an amount is received by an employee of a public sector company under the scheme of voluntary separation framed by such public sector company, the requirement of sub-rule (2)(i) shall not be applicable.

(4) In this rule, the expression "salary‖ includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

Introduction

An employer labelling a payment as VRS does not establish the deduction. Read the scheme requirements with the parent Act’s amount limit and restrictions on repeat or overlapping relief.

Rule breakdown

Check the employer and scheme category

Sub-rule (1) identifies public sector and other companies, statutory authorities, local authorities, co-operative societies, the stated universities and institutes, and notified institutions. Confirm any required notification rather than assuming every training institution qualifies.

The parent Act also requires its applicable schemes and conditions to be considered. Use the actual employer and scheme facts, not merely the payment description in a settlement letter.

Employee eligibility and workforce reduction

The general scheme condition is completion of ten years of service or forty years of age. The rule also requires the scheme to apply to the stated employees, including workers and executives, while excluding company or co-operative society directors.

The scheme must result in an overall workforce reduction; the vacancy must not be filled. A retiring company employee must not be employed in another company or concern under the same management. These are separate requirements.

Public-sector voluntary separation exception

Sub-rule (3) removes only the age-or-service condition in sub-rule (2)(i) for the specified public-sector-company voluntary separation scheme. It does not remove all the other scheme requirements.

Keep evidence of the employer’s public-sector status and the actual voluntary-separation scheme before applying that exception.

Understand the two stated payment formulae

Sub-rule (2)(vi) states that the receivable amount must not exceed either A or B, with A = 3 × N × S and B = M × S. N is completed service years, M is the remaining service months until superannuation, and S is salary at retirement.

Salary includes dearness allowance if the employment terms so provide, but excludes all other allowances and perquisites. Do not substitute total cost to company or take-home pay. Review the scheme against the exact alternative wording and the actual facts.

Apply the parent deduction conditions separately

Section 19, Table serial number 12, limits the deduction to the lower of the compensation received and ₹5,00,000. Section 19(2)(e) additionally addresses applicable scheme guidelines, the restriction after a deduction has been allowed in another tax year, and the specified section 157 relief overlap.

Passing a Rule 20 payment-formula check does not make the whole payment deductible or create a fresh ₹5,00,000 deduction every year.

Illustrative calculation and records

Hypothetical: N is 20 completed years, M is 60 months and the defined salary S is ₹20,000. A and B both equal ₹12,00,000. If the qualifying compensation received is ₹10,00,000, the separate Table serial number 12 cap is still ₹5,00,000, assuming all conditions are met.

Retain the scheme, service and age records, retirement salary components, superannuation date, workforce-reduction evidence, compensation statement and prior deduction or relief history.

Key takeaways

Eligible employer and scheme

Start with the listed employer categories and the applicable retirement or separation scheme.

Age or service alternative

The general condition is ten completed years of service or forty years of age, with the specified public-sector separation exception.

Separate the payment tests

Rule 20 contains scheme-payment formulae; section 19 separately caps the deduction and imposes other conditions.

Practical checklist

  • Review the complete scheme and eligible employer category.
  • Calculate N, M and S from supporting records.
  • Check the separate section 19 cap and prior relief history.

Avoid

  • Do not treat the public-sector exception as waiving every condition.
  • Do not use total cost to company as the defined salary.
  • Do not assume every severance payment or repeat-year payment qualifies.

FAQs

Must both ten years of service and forty years of age be satisfied?

The general condition uses “or”. The specified public-sector voluntary separation exception removes that condition as stated.

Does the public-sector exception remove the vacancy condition?

No. Sub-rule (3) refers specifically to sub-rule (2)(i), not all the remaining requirements.

Is the scheme formula the same as the deduction cap?

No. The formula is a Rule 20 scheme condition. Section 19 separately specifies the deduction amount and other restrictions.

Glossary

N
The number of completed years of service used in formula A.
M
The balance months of service until superannuation used in formula B.
S
Salary at retirement as defined by sub-rule (4), including qualifying dearness allowance but excluding other allowances and perquisites.

Official sources