Severance vs VRS: The Tax Hack That Could Leave You ₹1.5 Lakh Richer at Goodbye

Severance Pay vs VRS — What’s the Difference?

• Severance Pay is compensation given by a company when an employee’s services are terminated — due to restructuring, downsizing, or job redundancy.

• VRS (Voluntary Retirement Scheme), on the other hand, is offered to employees aged 40+ with 10+ years of service, allowing them to retire early with benefits.

While both are forms of financial relief, the tax rules differ, and understanding them can help maximize your post-exit income.

Taxation on Severance Pay

Under Section 10(10B) of the Income Tax Act, severance pay — often treated as retrenchment compensation — is partially tax-exempt.

• The exemption is the least of the following:

  1. ₹5,00,000

  2. Actual amount received

  3. 15 days’ average pay for each completed year of service

Anything beyond this limit is taxable under “income from salary.”

Taxation on VRS

For employees opting for VRS, the exemption falls under Section 10(10C) of the Income Tax Act, allowing up to ₹5,00,000 to be tax-free — provided the employee has not claimed this exemption before.

• The employee must not take another job in the same organization or group company.

• The exemption is available only once in a lifetime.

The Smart Tax Hack

Here’s where strategy comes into play:
If you receive both severance and VRS payouts separately, you can plan the timing to claim different exemptions under Section 10(10B) and 10(10C) — potentially saving ₹1.5 lakh to ₹2 lakh in taxes depending on your slab rate.

For instance, by spacing out your payouts over two financial years, you can optimize exemptions and reduce total taxable income.

Expert Tip

Before accepting your exit offer, consult a tax advisor to help you structure your compensation. With strategic planning, you can turn an emotional goodbye into a financially smart move.

Conclusion

Severance pay and VRS may both mark the end of a professional chapter, but they don’t have to be financially draining. By understanding and applying the right tax exemptions, you could easily walk away ₹1.5 lakh richer — and start your next journey on a stronger note.