What Is A Voluntary Retirement Scheme?

Introduction To Voluntary Retirement Scheme

Retirement is no longer about advancing age or declining health; it is increasingly about choice. While the traditional retirement age in India is 60, many individuals today prefer to retire much earlier, sometimes even by 40. A Voluntary Retirement Scheme (VRS) is one of the many ways to make this possible. Under VRS, companies allow employees to retire early while offering them financial compensation and other benefits. For employers, it serves as an effective way to reduce workforce costs without resorting to layoffs. Because the arrangement is mutually beneficial, the VRS scheme is often referred to as the “golden handshake”. 

Key Features Of Voluntary Retirement Scheme

Here are some highlights of the scheme: 

1. Voluntary nature: As the name suggests, opting for VRS is voluntary. Employees cannot be forced to accept it.   
2. Compensation and benefits: Employees opting for VRS receive a lump sum financial compensation, along with Provident Fund (PF), gratuity, and other applicable benefits. 
3. Eligible entities: The scheme can be offered by both private and government companies. 
4. Non-replaceable: Once an employee opts for VRS, the company cannot immediately hire another person to fill the same position. 
5. No re-employment: After opting for VRS, the employee cannot be re-employed by the same company, its subsidiaries, or any other company under the same management.

Objectives Of Voluntary Retirement Scheme

Eligibility Criteria For Voluntary Retirement Scheme

To be able to opt for VRS, employees must generally meet the following conditions:  

1. Age: At least 40 years old
2. Service period: At least 10 years of continuous service
3. Applicability: All employees except directors of companies or co-operative societies 

Benefits Of Voluntary Retirement Scheme

VRS is a mutually beneficial arrangement between companies and employees: Here are some of its key advantages: 

For employees

1. Financial support: Employees receive a lump sum financial compensation along with other entitlements, giving them the much-needed support for a smooth transition and a stress-free retired life. 
2. Tax benefits: Compensation up to ₹5 lakh is tax-free under Section 10(10C) of the Income Tax Act, subject to certain conditions.
3. Health benefits: Early retirement, especially from high-pressure or demanding jobs, often improves both physical and mental health. 
4. Freedom to pursue passions: Employees gain the flexibility to explore hobbies, start a business, or even switch to alternative careers. 

For employers

1. Cost reduction: VRS helps employers manage employee costs, especially when facing financial constraints or overstaffing. 
2. Workforce optimisation: VRS helps companies restructure their workforce and make way for younger talent and fresher perspectives. 
3. Cordial relationship: Layoffs often strain professional ties. VRS allows both parties to part ways on amicable terms. 
4. Fewer disputes: Since participation is voluntary, the chances of trade union or labour disputes are lower.   

How Is VRS Compensation Calculated?

VRS compensation is typically calculated as the higher of the following two options: 

1. 45 days’ salary for each completed year of service, or 
2. Total monthly salary multiplied by the months remaining until the standard retirement age

Example: 

Last drawn salary: ₹50,000 

Completed service: 20 years 

Years left until retirement: 5 years (60 months)

45 days’ salary for each year = ₹75,000 * 20 = ₹15,00,000 

Monthly salary * remaining months = ₹50,000 * 60 = ₹30,00,000

Therefore, VRS compensation = ₹30,00,000

Conclusion

The VRS scheme benefits both employers and employees. While employers gain from reduced costs and workforce restructuring, employees receive financial support and the freedom to retire peacefully. 

Also Read: Retirement Planner: Meaning, Steps & Importance