Senior citizen mistakenly paid tax on tax-free VRS compensation;
wins complete relief from ITAT Chennai on this ground
Jun 26, 2026
Synopsis
A senior citizen wrongly paid tax on Rs 24 lakh retrenchment compensation received under a BSNL Voluntary Retirement Scheme. Despite a significant delay, the Income Tax Appellate Tribunal (ITAT) in Chennai granted him full tax exemption, recognizing the compensation as tax-free under Section 10(10B). This ruling offers relief and highlights the possibility of rectifying tax errors.
Ms Hemalatha Govindarajulu from Raja Annamalai Puram, Chennai who worked in BSNL for quite some time had accepted BSNL's Voluntary Retirement Scheme (VRS)-2019. For this reason, she received ex-gratia compensation of about Rs 39.96 lakh (5+5.94+5+24.02).
However, while filing her income tax returns (ITRs), she claimed only the Rs 5 lakh tax exemption under Section 10(10C) and offered the balance amounts of Rs 5.94 lakh and Rs 24.02 lakh to tax for AY 2020-21 and AY 2021-22, respectively.
Later, after she learnt from WhatsApp forwards from colleagues, about various judicial rulings holding that BSNL VRS compensation qualifies for tax exemption under Section 10(10B) as retrenchment compensation, she immediately sought to fix her mistake and claim back her paid taxes. So she challenged the taxability of these amounts before the first appeallte authority.
However, she was late as she submitted an appeal to the first appellate authority (FAA) after a delay of 1582 days. The FAA dismissed his appeals without condoning the delay. Feeling aggrieved, she filed an appeal in the Income Tax Appellate Tribunal in Chennai (ITAT Chennai).
The legal stance was that the ex-gratia compensation received under the BSNL VRS scheme is fully tax exempt under Section 10(10B) of the Income Tax Act, 1961.
Advocate Ramesh Bhat represented Govindarajulu before ITAT Chennai and argued that the BSNL VRS 2019 scheme was approved by the Union Cabinet on October 23, 2019 and the compensation payable under the scheme was funded out of budgetary support provided by the Government of India.
Therefore, Bhat contended that the BSNL VRS-2019 scheme is not merely a voluntary retirement scheme in the ordinary sense, but is also a central government-approved retrenchment scheme that qualifies for exemption under Section 10(10B) of the Income Tax Act.
On May 21, 2026, ITAT Chennai ruled in Govindarajulu's favour and granted her full tax exemption on the VRS retrenchment compensation.
How is tax treatment of VRS determined for government and private sector employees?
Chartered Accountant Suresh Surana says that the tax treatment of compensation received under a Voluntary Retirement Scheme (VRS) depends on the nature of the employer, the scheme under which the payment is made, and the specific exemption provisions of the Income-tax Act, 1961.
As per Section 10(10C) of the Income Tax Act, 1961 (corresponding to Section 19(1) Sl. No, 12), an tax exemption of up to Rs 5 lakh is available in respect of amounts received by an employee at the time of voluntary retirement scheme (VRS) or voluntary separation from:
• a public sector company,
• any other company,
• an authority established under a Central or State Act,
• a local authority,
• a co-operative society,
• a university,
• an Indian Institute of Technology,
• a State Government,
• the Central Government,
• or notified institutions, subject to the scheme satisfying the conditions prescribed under Rule 2BA of the Income-tax Rules, 1962 (corresponding to Section 19(2)(h) of the ITA 2025).
Surana says: "The exemption can be claimed only once during the employee's lifetime, and any amount exceeding Rs 5 lakh is generally taxable under the head Salaries."
In the case of Government as well as private-sector employees, therefore, the general rule is that VRS compensation is eligible for exemption under Section 10(10C), subject to fulfilment of the prescribed conditions.
However, where the payment is characterised not as voluntary retirement compensation but as retrenchment compensation, Surana says that the tax exemption may instead be available under Section 10(10B), which provides exemption in respect of retrenchment compensation received under the Industrial Disputes Act, 1947, or any other law, to the extent prescribed therein.
Why did the employee win the VRS tax case?
Surana says that the employee succeeded because ITAT Chennai accepted the argument that the BSNL VRS-2019 compensation was, in substance, retrenchment compensation and not merely compensation under a conventional VRS. The ITAT Chennai also noted that several appellate authorities and the Chandigarh ITAT had consistently taken the same view and that the Revenue could not produce any contrary judicial precedent.
However, the ruling should not be interpreted to mean that every compensation received by employees under any such Scheme is automatically exempt from tax. The decision is based on the specific facts of the case and follows certain favourable Tribunal rulings on the issue.
Surana says: "Accordingly, although the ruling strengthens the position that compensation received under the BSNL VRS-2019 Scheme may qualify for full exemption, the availability of such an tax exemption would ultimately depend on the facts of each case and the evolving judicial position on the issue."
ITAT Chennai order and discussion
George George K, vice president and Ms. Padmavathy S, accountant member of ITAT Chennai, said that considering the facts and circumstances of the case and following the judicial precedents, they hold that the ex-gratia compensation received by the assessee (Govindarajulu) under the BSNL VRS-2019 scheme is eligible for tax exemption under Section 10(10B).
ITAT Chennai said that from evidence placed before them it is evident that the BSNL VRS-2019 scheme was formulated pursuant to the revival package approved by the Government of India and the Union Cabinet on October 23, 2019 and the compensation payable under the scheme was funded through Government budgetary support.
Moreover, Govindarajulu also pointed out to ITAT Chennai that though the nomenclature is mentioned as VRS, it is in effect a retrenchment scheme, since BSNL could not pay salary to employees just before rolling out the scheme. Therefore, ITAT Chennai said that the scheme partakes the character of a Government-approved retrenchment compensation scheme and cannot be treated as an ordinary voluntary retirement scheme simpliciter.
ITAT Chennai said that a similar case had come up for consideration before the Chandigarh Bench of the Tribunal in the case of Harish Kumar vs. ITO, wherein the Tribunal held that the ex-gratia compensation received under BSNL VRS-2019 is eligible for exemption u/s 10(10B) of the Income Tax Act.
Order:
Consequently, the additions made by taxing the ex-gratia compensation are directed to be deleted.
The AO is also directed to grant consequential relief, in accordance with law, in respect of exemption claimed under Section 10(10AA), if otherwise found eligible.
In the result, the appeals filed by the assessee are allowed. Order pronounced in the open court on 21st May, 2026 at Chennai.
Mihir Tanna, associate director, S K Patodia LLP said to ET Wealth Online: It is a settled position that taxpayer can make a fresh claim (or additional claim) before the Income Tax Appellate Tribunal (ITAT), even if it was not raised in the original return or before the Assessing Officer (AO). Thus, in case the tax amount is substantial and the matter is litigative which is settled or came to the knowledge of the taxpayer after filing ITR; he/she may decide to file an appeal to get relief in fresh claim (like in this case, appeal was filed to claim exemption based on other judicial pronouncements having similar facts)
Regarding the time limit for filing appeals, an appeal can be filed before CIT(A) within 30 days of receiving an adverse order/intimation received from CPC and an appeal before ITAT can be filed within 60 days of receiving the order from CIT(A). However, delay (if any) in filing appeal can be condoned by CIT(A)/ITAT if the reason is genuine and supported by documents. In this case, the delay in filing an appeal was supported by orders passed by the Tribunal.
[The Economic Times]
