What is Voluntary Retirement Scheme (VRS)

Before we get into the intricacies of the meaning of VRS or Voluntary Retirement Scheme, let’s get a clearer understand of what the term “voluntary retirement” actually means.

Most organizations in India have a retirement age of 60 (or 58 years, according to the policies of some companies). This age limit does not consider the individual's capacity to continue working. Voluntary retirement allows individuals to retire at an earlier age like in their 40's or 50's. This can benefit both employees who want to pursue other interests and companies who want to reduce excess workforce with no negative publicity.

VRS full form is Voluntary Retirement Scheme and it was introduced by the Government of India with the objective of increasing the profitability of both public and private firms. There are several reasons why an organization would implement VRS: first, to cut their overhead expenses, and second, to make up for a sales drop.

VRS is used by companies to make their jobs easier, like when they merge and need to reorganize their businesses. Moreover, technological improvements have reduced the need for human labor. Under a VRS scheme, an employee is offered the opportunity to retire before their retirement date.

The criteria for adopting VRS have been set by the Industrial Disputes Act of 1947. These rules include limits and requirements that safeguard the rights of both parties.

According to Indian labor rules, direct layoffs of employees are prohibited. A VRS program is a legitimate way for businesses to reduce expenses. It provides the employee with final decision-making authority. The Voluntary Retirement Scheme is available to employees who have completed at least 10 years of service and are at least 40 years old.

• To be eligible for VRS, an employee must have completed 10 years of service or be over 40 years old.
• Under VRS, companies settle employee provident fund (EPF) and gratuity obligations at the time of retirement.
• Section 10 (10C) of the Income Tax Act exempts up to Rs. 5 lakhs of VRS compensation from income tax. You must file it within the same tax year as your compensation payment.
• Employees might profit from rehabilitation, tax planning, and counseling, among other services. Companies provide aid to ensure a comfortable retirement.
• Retiring employees may not join another company in the same industry or under the same management.

The introduction of the Voluntary Retirement Scheme could benefit both organizations and employees. The major benefits of VRS include:

• VRS is a more humanitarian method of reducing excess manpower than termination of services. This way, the company's reputation remains intact.
• The payment of a large severance package to retiring employees reduces their animosity.
• As VRS is entirely voluntary, labor unions have no objections.
• VRS decreases payroll expenditures or wage bills by a substantial amount over time, even though initial compensation package costs are substantial.
• The company saves money by not having to pay monthly wages or salaries to employees who opt for VRS.

To be eligible for availing the benefits Voluntary Retirement Scheme, the following basic criteria need to be met by the applicant:

• Must be a salaried employee with a public or private company.
• Applicant cannot be a director or employee with an equivalent/higher rank.
• Applicant must be atleast 40 years old at the time of VRS application under current rules.
• VRS rules also specify that service tenure of the employee with current company must be 10 years or longer at the time of applying for voluntary retirement.

•  Financial Situation: Since the business pays a substantial amount of salary upfront, the employee is inclined to retire early. The income received may be used by the employee to support the requirements of family members, establish a business, etc.
•  Physical Health: If an employee's health is getting worse, they may ask to avail the voluntary retirement scheme and use the money to get better and then live a healthy life.
•  Job Satisfaction Issues: A lack of or a poor level of job satisfaction is a primary motivator for individuals to quit their employment and use VRS.
•  Future layoffs: Employees who expect a total or partial decline in the company's operations may think it's smart to apply for early retirement under VRS to get a financial benefit right away.

The pay under a VRS is dependent on the employee's most recently earned salary. It is possible to pay an amount equal to three months' income for each completed year of service. Multiplying the employee's income at the time of voluntary retirement by the number of months of service remaining until the actual date of retirement is an alternate method of computation. The majority of businesses employ both these techniques of computation. The VRS payment is the lesser of the two amounts determined using these procedures.