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Voluntary Retirement Scheme

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Voluntary Retirement Scheme
October 14, 2024

Table of Content

 

What is Voluntary Retirement? 

Voluntary retirement refers to the act of an employee choosing to retire from their job or position before reaching the mandatory retirement age. This decision is typically made by the employee, and it can be for various reasons such as personal, health, or financial reasons. Voluntary retirement is different from involuntary retirement, where an employee is forced to retire due to circumstances beyond their control, such as company restructuring or downsizing.

Voluntary retirement can provide employees with the opportunity to pursue other interests, spend more time with family, or enjoy their retirement. However, employees should carefully consider their decision, as it can have significant financial implications. Employees should ensure that they have a solid retirement plan in place, including sufficient savings and a clear understanding of their pension or retirement benefits.

In some cases, employers may offer voluntary retirement schemes (VRS) to employees, which can provide a financial incentive for them to retire early. These schemes can help employers reduce their workforce, cut costs, and restructure their organisation. Overall, voluntary retirement can be a positive choice for employees who are ready to move on to the next stage of their life.

What is the Voluntary Retirement Scheme?

Understanding VRS meaning is really easy. A Voluntary Retirement Scheme (VRS), also known as the golden handshake, is a mechanism offered by organisations that allows eligible employees to retire earlier than their stipulated retirement age. It is a mutually agreed-upon arrangement between the employer and employee, wherein the employee opts to leave the company voluntarily in exchange for a predetermined compensation package. This package usually includes accrued benefits such as gratuity, provident fund, and a severance amount.

The primary reason companies implement VRS is to streamline their workforce, often due to restructuring, downsizing, or financial constraints. By offering a financial incentive, organisations encourage employees to retire early, reducing their overall staff count. To prevent any misuse by companies, the Industrial Disputes Act of 1947 requires all organisations to adhere to specific provisions when implementing the voluntary retirement scheme.

For employees, VRS can be a strategic career move. It provides an opportunity for individuals to pursue other interests, start their own ventures, or simply enjoy a premature retirement. However, the employee must carefully evaluate the financial implications and future plans before making a decision.

How Does Voluntary Retirement Scheme (VRS) Work?

Employees who are above the age of 40 or have completed ten years of service are eligible for VRS. All executives and workers of companies and authorities of cooperative societies can opt for VRS. Cooperative society directors cannot avail themselves of the VRS policy. According to the regulations, the company can allow VRS to reduce their overall workforce. So, once somebody opts to retire early, the company cannot refill the position. Public Section Undertakings (PSUs) must ask the government for prior approval before offering their employees VRS. Private firms and companies can frame their own regulations. All companies must follow the government’s regulations as per Section 2BA under the Income Tax rules. Most importantly, an individual who opts for VRS cannot join another firm run by the same management.

Objective of the Voluntary Retirement Scheme 

Now that you know what is VRS, you must have an idea of its objective. The Voluntary Retirement Scheme (VRS) serves distinct purposes for both employees and organisations. For employees, VRS provides an opportunity to retire ahead of the mandatory retirement age, allowing them to pursue personal interests or explore new career paths. It offers an avenue to secure a financial package, often including a lump sum payment and other benefits, which can aid in retirement planning or starting new ventures. 

On the organisational front, VRS is a strategic tool to optimise workforce structure. By incentivising early retirement, companies can reduce labour costs, enhance operational efficiency, and facilitate organisational restructuring. Moreover, VRS can rejuvenate the workforce by creating opportunities for younger employees to assume leadership roles and contribute fresh perspectives.

How Did Voluntary Retirement Scheme Start in India?

There are certain Indian Labour Laws that do not allow employees to be retrenched, especially if they fall under a union. As per the Industrial Disputes Act, 1947, employers cannot reduce the size of their task force through retrenchment. Trade unions strongly oppose making employees redundant. VRS came about as a legal solution for this problem. Since the scheme is voluntary, the trade unions do not oppose it.

When Can a Firm Opt for a Voluntary Retirement Scheme?

Companies can only implement VRS under specific circumstances. These rules help ensure that employers do not take advantage of those working for them. Most often, companies implement VRS when they’re facing intense market competition or business recession. Sometimes, companies offer VRS during joint ventures with foreign companies or takeovers and mergers. Finally, the last reason employers opt for VRS is when their products or technology become obsolete. 

Features of Voluntary Retirement Scheme (VRS)

The Voluntary Retirement Scheme (VRS) offers certain key features:

  • Either the employee must have completed ten years of service or he must be 40 years of age, to be eligible for VRS.

  • The company must have cleared all the arrears related to payment of gratuity and provident fund to the employee retiring under the Voluntary Retirement Scheme.

  • The amount received by the employee retiring under VRS as compensation shall be exempted from tax under Section 10 (10C) of the Income Tax Act, 19611 up to Rs. 5 lakh. This benefit can only be claimed in the assessment year in which the compensation was received.

  • The company should also provide support to the employees in terms of tax consultancy and guidance to facilitate a seamless and trouble-free retirement process.

  • Upon the employee's retirement through the VRS plan, the company is not allowed to fill the position.

  • Once an employee chooses the voluntary retirement scheme, they are not permitted to join another company under the same management.

Eligibility Criteria for a Voluntary Retirement Scheme (VRS) 

The Voluntary Retirement Scheme (VRS) offers employees an opportunity to retire ahead of the normal retirement age. However, specific criteria must be met to avail of this scheme.

  • Minimum Service Period: Employees generally need to have completed a minimum number of years of service with the organisation. This period varies between companies but is commonly ten years.

  • Age Limit: Most VRS schemes mandate a minimum age for eligibility. Typically, employees must be at least 40 years old to opt for voluntary retirement.

  • Employee Category: The scheme may apply to all employees except the directors of the company.

  • Company-Specific Rules: Each company has its own VRS guidelines, which may include additional eligibility conditions based on factors such as job roles, departments, or performance metrics.

What are the rules for Voluntary Retirement Scheme? 

When it comes to understanding VRS meaning, certain guidelines and regulations must be adhered to:

  • A voluntary retirement scheme serves as a means to reduce the overall workforce of a company. Consequently, the company is restricted from recruiting new employees to fill the positions vacated by those who opt for retirement.

  • Employees who apply for voluntary retirement are prohibited from pursuing employment opportunities within the same company, its management, or any related company. They are, however, at liberty to seek employment elsewhere if they so desire.

How is Compensation under a VRS calculated? 

Compensation under a Voluntary Retirement Scheme (VRS) is determined by the following factors:

  • Last Drawn Salary: The employee's final salary, including basic pay and dearness allowance, forms the basis for the calculation.

  • Years of Service: The length of an employee's tenure with the company is a crucial determinant.

Companies usually employ one of two methods:

  • Three Months' Salary per Year: The employee receives three months' salary for each completed year of service. 

  • Remaining Months' Salary: The employee's last drawn salary is multiplied by the number of months remaining until the standard retirement age.

The final compensation is generally the lower amount calculated using either of the above methods.

Some companies may include other elements such as gratuity, provident fund, and ex-gratia payments in the VRS package.

When is VRS Helpful?

An example helps us understand how helpful VRS can be. In 2019, BSNL decided to merge with MTNL, a PSU. So, they offered their employees VRS, allowing them to leave with whatever was owed to them. According to reports, over 92,000 employees from BSNL decided to go for VRS.

The voluntary retirement scheme provides benefits to both parties. When executed well, it can be a boon for everybody involved.

Conclusion

The Voluntary Retirement and VRS present a complex interplay of organisational needs and individual aspirations. While it offers opportunities for early retirement and financial benefits to employees, it also impacts workforce dynamics and organisational restructuring. Careful consideration of the scheme's implications is crucial for both employers and employees. As the economic landscape continues to evolve, the role of VRS in workforce management is likely to remain significant. For those opting for early retirement, securing a stable financial future becomes a top priority, and this is where plans like the HDFC Life Pension Plans can play a crucial role. These pension plans ensure a steady income post-retirement, providing peace of mind for employees taking the VRS route.

FAQs on Voluntary Retirement Scheme (VRS)

Q. What is VRS's full form?

The full form of VRS is a Voluntary Retirement Scheme. It is a scheme provided by employers to enable employees to retire voluntarily, usually before the normal retirement age.

Q. Who can avail benefits of VRS?

The benefits of VRS can be availed by employees who meet certain eligibility criteria set by their respective employers. Generally, any employee who has completed a minimum of 10 years of service or has attained the age of 40, is eligible to avail of the benefits of VRS.

Q. When is the right time for an Individual to consider taking VRS?

The decision to consider taking VRS depends on several factors that vary from individual to individual. Some common reasons for considering VRS include a desire for early retirement, health concerns, wanting to pursue other interests or a change in personal circumstances.

Q. Will I receive a pension after availing of VRS?

Whether an individual will receive a pension after availing of VRS depends on the terms and conditions of the specific VRS scheme implemented by the employer. Employers may offer various options such as the payment of a lump sum amount or the provision of a pension. The terms and conditions of the VRS scheme must be reviewed carefully to understand the retirement benefits one may be entitled to.

Q. What are the voluntary retirement rules for state government employees?

The voluntary retirement rules for state government employees are typically governed by the respective state government's regulations. The eligibility criteria, benefits, and procedures may vary between different states. Generally, state government employees who have completed a certain number of years in service or have attained a specified age are eligible to avail of the VRS. 

It is advisable to refer to the specific rules set by the concerned state government or consult with the department responsible for employee welfare to obtain accurate and up-to-date information regarding VRS for state government employees.

References:

https://cleartax.in/glossary/voluntary-retirement-scheme

https://dpe.gov.in/dpe-guidelines/voluntary-retirement-scheme-(vrs)

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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