What is the Voluntary Retirement and its Benefits?

People dream of retiring early for many reasons. Whether it’s to start their own business, dive into hobbies they’ve always wanted to pursue, or simply relax and enjoy life with their loved ones, an early retirement allows them to live life how they see fit. Voluntary retirement schemes (VRS) make this dream a reality by giving people a way to retire sooner than the standard age of 60. Employers also benefit from voluntary retirement schemes, as they offer a way to reduce their salary expenses and increase efficiency.

But how exactly do these voluntary retirement schemes work, and what benefits do they offer? Let’s dive in and explore in detail.

What is Voluntary Retirement?

Different professions have different retirement ages, but on average the retirement age in India is around 60 years. With voluntary retirement schemes, employers offer employees a way to retire before the normal age of retirement, while still giving them benefits such as severance pay, gratuity, and provident fund. This benefits the employers as well by allowing them to reduce their workforce in a more humane and cost-effective way.

VRS is also sometimes called ‘the golden handshake’ because it is a mutually beneficial solution which offers advantages for both employers and employees. Employers can optimise their workforce, hire younger employees, cut costs, and overall increase the productivity of the company, and employees get an opportunity to retire early with financial security.

Benefits of Voluntary Retirement Scheme

The benefits of voluntary retirement schemes extend to both employers and employees. Let’s see how:

VRS Benefits for Employees

• VRS allows employees to retire early, which gives them the opportunity to pursue other goals such as starting their own business, exploring new hobbies, travelling, or spending more time with family.
• The scheme is voluntary, which gives employees the freedom to choose whether or not they want to retire early.
• Employees receive a generous package that acts as a financial safety cushion. It includes severance amount, gratuity, and provident fund payments.
• Some companies also offer healthcare packages which include insurance coverage for the employee and their dependents. Companies may sometimes also offer other special benefits like life insurance.
• Consultations with financial planners and advisors are also often included in VRS which helps employees manage their retirement funds and taxes.
• Employees can claim a maximum of Rs. 5 lakh as a tax exemption on VRS payments under Section 10 (10C) of the Income Tax Act. This reduces the tax burden, but the exemption must be claimed on the same assessment year the VRS payment was received.
• VRS can act as an escape rope for employees feeling overwhelmed by their current job and looking for a change.
• By following the rules and regulations given under the Industrial Disputes Act of 1947, companies ensure transparency and fairness in the voluntary retirement process.

VRS Benefits for Employers

• VRS helps companies cut costs through workforce reduction. Senior employees usually have higher salaries, so when they retire early, companies can save money by hiring new employees at lower salaries after a certain period.
• Cost-cutting improves the efficiency and productivity of the company.
• Companies that offer voluntary retirement are looked at positively by employees as they provide a considerate option for those looking to leave the workforce early.
• Since trade unions are involved in negotiating employee rights and conditions, they support voluntary retirement schemes as they ensure employees are treated fairly and given full benefits.
• Voluntary retirement is a healthy and ethical way for companies to reduce their workforce.

How Does the Voluntary Retirement Scheme Work?

Before we get into the workings of voluntary retirement schemes, let’s first take a look at how they began in India. When companies face financial difficulties, they need to optimise productivity by cutting costs. One of the most effective ways to do this is by letting go of some of the workforce, which is known as retrenchment. Under Indian law, specifically the Industrial Disputes Act of 1947, retrenchment comes with very strict regulations.

To avoid conflicts between employers and employees, companies started offering voluntary retirement schemes as a more amicable solution. It allowed companies to reduce their workforce without having to deal with any legal complexities or opposition from trade unions. 

Here’s how voluntary retirement schemes work:

• To be eligible for VRS, the employee must be older than 40 and should have completed at least 10 years of service in the company.
• The employee must also not be working with another company at the time of availing VRS.
• This scheme is generally offered to all employees of the company, from executives to junior staff. However, some directorial and managerial positions such as cooperative society directors cannot avail of VRS.
• Before Public Sector Undertakings can offer VRS, they must get approval from the government, but private companies have more flexibility in implementing Voluntary Retirement Schemes.
• Companies must also follow the guidelines outlined in Rule 2BA given in Section 10 (10C) of the Income Tax Act.

Features of Voluntary Retirement Scheme (VRS)

It’s important to check out these features of VRS before you adopt it:

• Those applying for VRS must be at least 40 years old.
• VRS applicants must have also completed 10 years of service at the company.
• As the name suggests, VRS is voluntary, so the decision to retire early rests entirely with the employee and they are free to keep working in the same company if they want.
• After voluntary retirement, the company must clear all provident fund and gratuity payments due to the employer.
• The retirement package includes a lump sum payment, gratuity, and provident fund payments.
• According to Section 10 (10C) of the Income Tax Act, employees can benefit from an exemption on VRS payments up to Rs. 5 lakh. This benefit, however, is only applicable in the year the retirement payment is received.
• Companies offer professional consultations such as financial planning, retirement counselling, and tax advice to employees considering VRS. 
• After an employee retires through VRS, the company cannot replace them with another employee for a specified period.
• The employee is also not allowed to join the same company or any of its associated organisations for a specific period after retiring through VRS.
• VRS compensation is calculated based on a formula that considers various factors such as the employee’s last drawn salary, years of service, and any additional benefits as per the company’s policies. 

Conclusion

Voluntary Retirement Schemes allow employees to enjoy the benefits of an early retirement, and also give employers a legal and ethical way to reduce their workforce and increase their company’s productivity. Since both employers and employees get many benefits from VRS, it becomes a win-win situation for all which contributes to a positive work environment.If you are someone who’s considering applying for voluntary retirement, remember to carefully review the terms of the scheme, understand the implications it will have on your financial life.

And evaluate how the benefits of VRS align with your long-term financial goals.It’s also wise to consult with a financial advisor so that you can make sure the decision you’re about to make is well-informed and doesn’t have a negative impact on your financial security.