Voluntary Retirement Scheme – Definition, Understanding & How it Works?

7 min read • Updated 14 March 2023
Written by Krishna Deshmukh
Voluntary Retirement Scheme – Definition, Understanding & How

A voluntary retirement scheme (VRS) is one of the popular methods implemented by companies to reduce its employee strength. Such measures are usually taken up in times of economic hardship or to disengage employees who have outlived their productive period of service in that company. VRS is a cordial way for companies to let go of some of their employees, which is often known as the “Golden Handshake” between the organisation and its employees. 

Let’s understand why employees receive this offer and what its benefits are. 

What Is a Voluntary Retirement Scheme (VRS)? 

VRS is offered to employees by a company, and sometimes employees willingly retire from their services before their retirement date. Any employee at any level (with few exceptions), with sufficient work experience in an organisation can opt for voluntary retirement; this is applicable for both public and private sector organisations. 

This can be a cost-cutting measure by the organisation; additionally, many employees opt for voluntary retirement for personal choices. However, it should be noted that an employee retiring voluntarily cannot apply to another organisation in the same industry or under the same management.

How Does the Voluntary Retirement Scheme Work? 

A voluntary retirement scheme comes with specific terms and conditions. An employee must be above 40 years of age and should have completed a minimum of 10 years of service in a particular organisation, to be eligible for voluntary retirement. Private organisations can frame different schemes; however, the schemes must conform to the guidelines under section 2BA of the IT Act. 

Additionally, as per Rule 48A of CCS (Pension) Rules, 1972, a government servant is qualified to avail of VRS only after 20 years of continued service.  

When implemented by an organisation or government institution, voluntary retirement will result in an overall lower number of employees than before, and the vacancy cannot be filled up. Public Sector Undertakings (PSUs) will have to take prior permission from the government to practise such measures.

What Are the Features of VRS? 

Take a look at the following features which apply to Voluntary Retirement Scheme despite any terms and conditions: 

  • Organisations cannot fill up the vacancies that come out after implementing VRS.
  • Retired employees cannot join any other functional organisation under the same management or industry. 
  • Employees who opt for VRS in a private-sector company should be a minimum of 40 years or have served 10 years in that organisation. 
  • Companies should pay off their employees all dues regarding Provident Fund and gratuity at the time of VRS. 
  • Companies offer assistance such as tax consultation and counselling at the time of retirement to work out the whole process evenly. 
  • Compensation of up to 5 lakhs under VRS is tax-exempt as per Section 10 (10C) of the Income Tax Act, 1961. However, to avail of this benefit, the employee must claim it in the same assessment year of receiving it. 

What Are the Benefits of the Voluntary Retirement Scheme? 

With the implementation of the Voluntary Retirement Scheme, both the organisation and the employee can benefit in many ways.

  • This practice is transparent and, most importantly, ‘voluntary’. Hence, the organisation does not face any opposition from Trade Unions. 
  • Employing a sufficient number of employees is economically beneficial for an organisation. Offering retirement to a surplus workforce helps the company to increase efficiency and productivity. 
  • VRS is also effective in fighting competitors. Due to globalisation, companies are facing heavy competition. In such a scenario, letting go of a non-productive workforce can be cost-effective and help to increase net profit. 
  • Employees are offered compensation at the time of VRS. Some companies may also offer non-monetary benefits to their retirees. 
  • Employees have the freedom to utilise the compensation in various ways. For example, they can start their venture, choose a new career or pursue hobbies, and even relocate to a new place. 

When Can a Company Offer a Voluntary Retirement Scheme? 

Even if the Voluntary Retirement Scheme is a fair and just practice, companies can only imply it under certain scenarios. They are as below: 

  • When a company has a surplus workforce.  
  • When the organisation faces intense competition in the market or significant economic declination for quite some time. 
  • During mergers and acquisitions, takeovers or joint ventures with foreign establishments.
  • When the products or technology of an organisation becomes outdated or redundant. 

How Is the Compensation for VRS Calculated? 

The compensation or monetary benefits provided to an employee who opts for VRS are calculated in the following way: 

  • The compensation given to an employee depends on the last paid salary of the employee.
  • Compensation offered by the company should be equal to the employee’s 3 months’ salary for each year of service provided. Or, it can be equal to the salary amount left to be paid till the actual retirement date. 
  • For public sector undertakings, this compensation should be equal to 45 days’ salary for each year of service or remuneration for the remaining period till the actual retirement date, whichever is less.

For example, if an employee has a last drawn salary of Rs. 50,000 per month and has completed 20 years of service, the compensation for VRS would be calculated as follows:

  • Last drawn salary: Rs. 50,000
  • Number of years of service: 20
  • Last drawn salary x Number of years of service = Rs. 50,000 x 20 = Rs. 10,00,000
  • The compensation for VRS in this example would be Rs. 10,00,000

However, It can vary from company to company, and different organisations have different policies regarding VRS.

When Do Employees Opt for Voluntary Retirement Scheme? 

The reasons why a company implements VRS have already been discussed. Here are some probable reasons why an employee might go for voluntary retirement: 

  • VRS comes with heavy compensation benefits; employees with financial liabilities can consider availing of the VRS scheme. 
  • Employees looking for a shift or change in their career may choose voluntary retirement to invest in new ventures. 
  • At times, employees dissatisfied with their career advancement in the said organisation or industry may seek early or voluntary retirement. 
  • Chances of future dismissal may trigger an employee to ask for early retirement.  

Final Word 

A Voluntary Retirement scheme is a transparent cost-cutting plan that organisations offer to employees who wish to leave an organisation willingly. However, there are some factors which organisations should assess before implementing this scheme. For example, implementing the VRS scheme should not put an excess workload on the existing workforce. Additionally, employees should analyse the compensation before opting for voluntary retirement. 

Frequently Asked Questions

Why was the Voluntary Retirement Scheme introduced? 

As per the Industrial Disputes Act of 1947, organisations cannot cut off their employees in case of surplus staff. Such an act of reduction is also against Indian Labour Laws and faces opposition from trade unions. The Voluntary Retirement Scheme was introduced as an alternative legal measure. Moreover, as it is ‘voluntary’, not ‘mandatory’, trade unions do not seem to oppose the practice.

Who is not eligible for the Voluntary Retirement Scheme?

Any employee who has served an organisation for a minimum of 10 years or is above 40 years of age is eligible for Voluntary Retirement Scheme. Only Directors of an organisation or cooperative society are not eligible for the VRS scheme. 

What is the main objective of the Voluntary Retirement Scheme? 

The voluntary Retirement Scheme was introduced while keeping an organisation’s economy and resource utilisation in mind. Also, it will provide relief to employees who want to retire early and have plans after that.

Do well-established companies implement the Voluntary Retirement Scheme? 

Many well-established firms have implemented Voluntary Retirement Schemes from time to time. Companies such as Hindustan Unilever Ltd., TISCO, SAIL, and Castrol have opted for VRS. A recent example would be BSNL announcing VRS for its employees in 2019 after its merger with MTNL. Reportedly, around 92,000 staff of BSNL and MTNL opted for voluntary retirement.

What are the drawbacks of a Voluntary Retirement Scheme?

The Voluntary Retirement Scheme aims to benefit both the organisation and its employees. However, VRS has certain drawbacks, such as it can put additional workload on existing employees, if not managed properly.Efficient employees may leave the firm and thereby reduce the skill base of the firm. It might create a sense of insecurity in the minds of employees who did not opt for VRS.

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Krishna Deshmukh

Investment Principal
Krishna is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.E. (Hons) in Computer Science Engineering from BITS Pilani and MBA (Finance) from JBIMS, Mumbai. He is currently working as Investments Principal at Wint Wealth. Previously he worked at Kotak Mahindra Bank at their DCM desk and Northern Arc Capital at their Structured Finance desk.

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