CBDT issues new clarification on BSNL-MTNL VRS-2019 compensation: Will it affect retirees' income tax benefits?

In light of multiple legal cases and disputes regarding taxability of voluntary retirement scheme (VRS), the Central Board of Direct Taxes (CBDT) has issued a new notification clarifying the income tax treatment of VRS.

CBDT notification (F. No.173/32/2026-ITA-I) dated October 22, 2026 clarified that ex-gratia compensation received by employees retiring under Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) Voluntary Retirement Scheme, 2019 (VRS-2019), is governed by Section 10(10C) of the Income-tax Act, 1961, and is not covered under Section 10(10B), which deals with compensation on retrenchment.

CBDT said in the notification: “The matter has been examined by the Board in consultation with the Department of Telecommunications whereupon vide OM dated 08.04.2026…it has been clarified that the ex-gratia compensation paid under BSNL and MTNL VRS-2019 is in the nature of compensation received on voluntary retirement…”


This CBDT notification only clarifies that compensation under the BSNL and MTNL VRS-2019 must be treated as voluntary retirement compensation under Section 10(10C), and not as retrenchment compensation under Section 10(10B)

What does it mean for retirees?

The CBDT’s clarification (F. No. 173/32/2026-ITA-I dated October 22, 2026), clarifies the Income Tax Department’s position on the tax treatment of ex-gratia compensation paid to employees who retired under the BSNL and MTNL Voluntary Retirement Scheme, 2019.

Chartered Accountant Suresh Surana says that after reading this notification, employees who have claimed or are pursuing tax exemption claims under section 10(10B) for their VRS should review their position, including any existing assessment or judicial order. Any corrective action would depend on the applicable statutory procedure and time limits.

According to Surana any pending condonation applications seeking revision of income tax returns (ITRs) to claim relief under Section 10(10B) will be dealt with in light of the above mentioned CBDT’s clarified position, and the underlying exemption claim will have to be examined under Section 10(10C).

Surana says that employees should do this exercise as the CBDT notification confirms that if the payment is compensation for voluntary retirement then it is governed by Section 19(1), Table, Sl. No. 12 of the Income-tax Act, 2025 (corresponding to Section 10(10C) of the Income Tax Act, 1961), and not retrenchment compensation under Section 19(1), Table, Sl. No. 10 of the Income Tax Act, 2025 (corresponding to Section 10(10B) of the Income Tax Act, 1961).

Section 10(10C) of the Income Tax Act, 1961 (corresponding to Section 19(1) Sl. No, 12), allows a tax exemption of up to Rs 5 lakh for amounts received by an employee at the time of voluntary retirement or voluntary separation from a public sector company, any other company. This tax exemption can be claimed only once during the employee's lifetime, and any amount exceeding Rs 5 lakh is generally taxable under the heads of income "Salaries."

Surana says that the general rule is that VRS compensation is eligible for income tax 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 income 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.

This distinction is significant because Section 10(10C) allows an eligible employee an exemption of up to Rs 5 lakh, subject to the prescribed conditions. Therefore, Surana says that the CBDT clarification(October 22, 2026 notification) does not make the entire ex-gratia payment tax-free. Where the compensation exceeds Rs 5 lakh, the balance would ordinarily remain taxable as salary income. The exemption under Section 10(10C) is also a one-time benefit. Once allowed to an employee for any assessment year, it cannot be claimed again for another year.

Further, if relief under Section 157 of Income Tax Act, 2025 (corresponding to section 89 of Income Tax Act, 1961) has been allowed in respect of the VRS compensation, the employee cannot subsequently claim exemption under Section 10(10C) for that amount. Thus, such specified employees cannot claim exemption under Section 10(10B) because their services ended following a voluntary option exercised under VRS-2019 and not because of retrenchment initiated by the employer.

The CBDT has also distinguished the high court decision in Hindustan Photo Film Workers Welfare Centre, noting that it involved a company undergoing winding up and a severance arrangement materially different from the BSNL and MTNL schemes.

Surana says that this CBDT clarification does not amend the law or introduce a new exemption. It only settles that compensation under the BSNL and MTNL VRS-2019 must be treated as voluntary retirement compensation under Section 10(10C), and not as retrenchment compensation under Section 10(10B). Employees who correctly claimed exemption under Section 10(10C) may not be affected.

However, those who claimed or intended to claim exemption under Section 10(10B) may need to review their returns. Surana says that this clarification will guide the Income Tax Department’s handling of pending claims and condonation applications, subject to the applicable statutory provisions and binding judicial decisions. Condonation may allow a delayed claim to be considered, but it does not automatically grant the exemption.

For VRS received due to closure of the factory, what happens?

Compensation received by an eligible workman upon the closure of the factory or undertaking in which they were employed is deemed to be retrenchment compensation. It is therefore eligible for exemption under Section 19(1), Table, Sl. No. 10 of the Income Tax Act, 2025 (corresponding to Section 10(10B) of the Income Tax Act, 1961).

Surana says that the tax exemption is generally restricted to the lower of:

• actual compensation received
• the amount calculated under Section 25F(b) of the Industrial Disputes Act, 1947 or
• Rs 5 lakh

Any excess would ordinarily be taxable as salary income, although relief under Section 157 of Income Tax Act, 2025 (corresponding to section 89 of Income Tax Act, 1961) may be available, subject to the applicable conditions. Where compensation is paid under a scheme specifically approved by the Central Government for this purpose, the normal limits do not apply and the compensation may qualify for full exemption under the second proviso to section 10(10B) (corresponding to section 19(1), Table, Sl. No. 11, of the Income Tax Act, 2025).

Accordingly, where employment ends because of the closure of a factory or undertaking, the payment may qualify as retrenchment compensation even if the package is described as a “VRS.” However, if employees genuinely exercise an option to retire under a voluntary retirement scheme, the compensation would instead be examined under Section 19(1), Table, Sl. No. 12 of the Income-tax Act , 2025 (corresponding to Section 10(10C) of the Income Tax Act, 1961).

The applicable tax treatment will therefore depend on the substance of the arrangement and the circumstances in which employment ended, rather than merely the title given to the scheme.