Voluntary Retirement Compensation (VRS)

The Voluntary Retirement Scheme is a program that is introduced by companies in their organizations. Under this scheme, employees can voluntarily take early retirement before the standard retirement age. 

This scheme proved beneficial for the employees who want to retire early for personal reasons, as well as companies that want to reduce their workforce and operational costs.

What is Voluntary Retirement Compensation?

The VRS full form is Voluntary Retirement Scheme, and under this scheme, the employees are given compensation and financial benefits, which are known as the Voluntary Retirement Compensation. 

Companies have introduced this scheme to manage their employee turnover costs and complete their downsizing needs. It provides benefits for both the employees and the companies. 

Key Points: 

• Employee Benefits: There are many benefits for the employee provided by a company after retirement, such as a provident fund, gratuity, etc. Employees can enjoy their lives and pursue their hobbies or simply relax.
• Eligibility: To be eligible for the compensation, the employee should be above the age of 40 years and have served for at least 10 years.
• Company Objectives: This scheme helps companies reduce their workforce, save costs, and increase operational efficiency.

How does VRS work?

Here is the process by which the VRS works:

1. Eligibility Criteria

• The employees should be more than 40 years of age.
• The employee should have completed 10+ years of service.
• The employees at the post of directors are not eligible for VRS compensation.

2. Government Approval

For a company, it is important to get approval from the government before implementing the scheme of voluntary retirement in its organization.

3. Tax Rules

The VRS is governed by Section 2BA of the Income Tax Act. It offers many other benefits to the employee who is getting the compensation. 

4. Post-VRS Restrictions

Employees are not allowed to join another organization managed by the same company after opting for VRS.

Objectives of VRS

Here are the objectives of VRS:

For Employees

• It allows early retirement for employees and also provides financial benefits.
• It provides an opportunity for employees to pursue their personal Interests.

For Companies

• VRS helps in facilitating cost reduction and optimizing the workforce.
• It works as a legal alternative to retrenchment, which avoids the trade union opposition. 

Features of VRS

The features of VRS are given below:

• Financial Assistance: VRS provides gratuity, provident fund, and tax consultation to support financially.
• Non-Replacement: Vaccancies that are created by the VRS cannot be filled by the new hires. 
• Fair Compensation: The compensation is based on the service tenure and the last drawn salary.
• Voluntary Nature: The employees opt for the VRS by themselves without any force. 
• Tax-free Compensation: You can exempt money from the income tax up to Rs 5 lakhs. It should be availed within the same financial year.

Benefits of VRS

There are many benefits of VRS for Employees and Companies. Here are a few of them: 

For Employees 

• It provides financial security with early retirement benefits.
• The Compensation up to Rs 5 lakhs is tax-free.
• You will get access to your provident fund, gratuity, and counselling for a seamless transition.
• You will get the compensation of 45 days of salary per year of service. You can also get a multiple of your monthly wage.

For Companies

• They can avoid the trade union disputes.
• They can gain improved productivity with a leaner workforce.
• Their cost of operations will be reduced, and the workforce will be optimized.
• They maintain positive relations with the employee who is departing.

Calculation of VRS Compensation

The compensation in VRS is calculated with the help of the last drawn salary of the employee:

1. It would be the 45 days' salary of the employee for each completed year of service.
2. The total of the monthly salary is multiplied by the months remaining in the standard age of retirement.

The compensation given to the employee would be the higher of the above two amounts.

Why was VRS introduced in India?

There are two reasons for the Voluntary Retirement Scheme in India:

1. Legal Constraints on Retrenchment: According to the Industrial Disputes Act of 1947, companies are not allowed to directly terminate employees for cost-cutting. This gives the security to the employees from getting terminated without their choice. 

2. Solution for the Excess Workforce: VRS gives a voluntary opportunity to the employees to retire and enjoy the financial benefits. It also helps in avoiding confrontation with the trade union, as this option is considered unfair for the employees.