The Central Board of Direct Taxes (CBDT) has clarified the income tax treatment of compensation received by former employees of Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) under the Voluntary Retirement Scheme (VRS) 2019. The Board has specified that the ex-gratia compensation paid under the scheme will be treated as voluntary retirement compensation and not retrenchment compensation.
In a notification dated October 22, 2026 (F. No. 173/32/2026-ITA-I), the CBDT clarified that such payments are covered under Section 10(10C) of the Income-tax Act, 1961, and not Section 10(10B), which deals with compensation received on retrenchment.
The clarification follows representations and legal disputes concerning the tax treatment of compensation received by employees who opted for the BSNL and MTNL VRS-2019.
What does CBDT’s clarification mean for BSNL, MTNL retirees?
The clarification establishes that compensation received by employees who opted for the BSNL and MTNL VRS-2019 will be treated as voluntary retirement compensation rather than retrenchment compensation.
This distinction determines which income tax exemption provision applies to the compensation. Since employees voluntarily opted for retirement under the scheme, the payments will be examined under Section 10(10C) rather than Section 10(10B).
The notification also provides clarity for employees who have already filed income tax returns or have pending claims relating to the compensation.
Those who claimed or intended to claim exemption under Section 10(10B) may need to review their tax positions in light of the CBDT’s clarification. Pending applications seeking condonation of delay to revise income tax returns (ITRs) will also be considered in accordance with the clarified position and applicable statutory provisions.
However, the notification does not automatically invalidate existing assessments or judicial orders. Any corrective action will depend on the applicable legal provisions and prescribed time limits.
How much VRS compensation is tax-free under Section 10(10C)?
Under Section 10(10C) of the Income-tax Act, 1961, eligible employees can claim an income tax exemption of up to Rs 5 lakh on compensation received at the time of voluntary retirement or voluntary separation, subject to prescribed conditions.
Any amount exceeding Rs 5 lakh is generally taxable as salary income. The exemption can also be claimed only once during an employee’s lifetime.
This means the CBDT clarification does not make the entire ex-gratia compensation received under the BSNL and MTNL VRS-2019 tax-free. Eligible retirees can claim exemption only up to the prescribed limit, provided they fulfil the applicable conditions.
Employees who have already claimed the exemption under Section 10(10C) should check whether they have met the eligibility requirements and whether they have previously used this one-time benefit.
The treatment of compensation under Section 89 of the Income-tax Act, 1961, which provides relief in certain cases involving salary received in arrears or in advance, must also be considered while determining the tax treatment. The applicable provisions do not permit the same compensation to receive overlapping tax relief.
Section 10(10B) vs Section 10(10C): How do the tax rules differ?
The two provisions cover different types of employment-related compensation. Section 10(10C) deals with compensation received by eligible employees on voluntary retirement or voluntary separation. It provides an exemption of up to Rs 5 lakh, subject to prescribed conditions.
Section 10(10B), on the other hand, covers retrenchment compensation received under the Industrial Disputes Act, 1947, or other applicable laws.
The distinction is important because voluntary retirement and retrenchment are different forms of employment termination. Under a VRS, employees voluntarily choose to leave their jobs under an offered retirement scheme. Retrenchment generally involves the employer terminating employment under the applicable labour laws.
In the case of BSNL and MTNL VRS-2019, employees exercised their option to retire voluntarily. The CBDT has therefore clarified that the compensation falls under the provisions governing voluntary retirement.
The Board has also distinguished the High Court decision in the Hindustan Photo Film Workers Welfare Centre case, noting that it involved a company undergoing winding up and a severance arrangement materially different from the BSNL and MTNL schemes.
What happens to tax exemption when a factory or undertaking closes?
The tax treatment can be different when an employee loses their job because of the closure of a factory or undertaking. Under Section 10(10B) of the Income-tax Act, 1961, compensation received by an eligible workman on the closure of the factory or undertaking in which they were employed is treated as retrenchment compensation and may qualify for tax exemption.
The exemption is generally restricted to the lowest of the following:
- Actual compensation received.
- Compensation calculated under Section 25F(b) of the Industrial Disputes Act, 1947.
- Rs 5 lakh.
Any excess amount would ordinarily be taxable as salary income, although relief under Section 89 may be available, subject to applicable conditions.
However, a separate provision applies where compensation is paid under a scheme specifically approved by the Central Government for this purpose. In such cases, the normal exemption limits may not apply, and the compensation may qualify for full exemption under the relevant statutory provisions.
Therefore, the tax treatment depends on the circumstances in which employment ended and the nature of the compensation, rather than simply the name given to the retirement or severance scheme.
What should BSNL and MTNL VRS retirees do now?
Former BSNL and MTNL employees who received compensation under VRS-2019 should check how they reported the payment in their income tax returns.
Those who claimed exemption under Section 10(10C) should verify whether they fulfilled the prescribed conditions and whether they have already availed the one-time benefit.
Employees who claimed or intended to claim exemption under Section 10(10B) should review their position in light of the CBDT notification dated October 22, 2026.
The clarification will guide the Income Tax Department while examining pending claims and condonation applications. However, condonation of delay only allows a delayed claim to be considered; it does not automatically guarantee an exemption.
The CBDT notification clarifies the tax treatment of compensation received under the BSNL and MTNL VRS-2019. The actual tax relief available to individual retirees will depend on the applicable statutory provisions, eligibility conditions and any binding judicial decisions.