Severance vs VRS: The tax hack that could leave you ₹1.5 lakh richer at goodbye

Voluntary retirement isn’t just a career move — it’s a tax game. In a tightly packed thread on X, Sujit Bangar, founder of TaxBuddy.com, broke down how choosing the VRS route over severance can save lakhs in taxes — and why most people fumble it.

The key, Bangar said, lies in Section 10(10C) of the Income Tax Act, which offers up to ₹5 lakh exemption on VRS payouts. “Same ₹15 lakh, but ~₹1.5L lower base tax,” he noted, comparing two cases: Rajesh, who took severance, and Suresh, who went with VRS.

Rajesh’s full ₹15L severance was taxed along with ₹4L notice pay — a ₹19L taxable slab. At 30%, that’s ₹5.7L in base tax.

Suresh, however, claimed the ₹5L 10(10C) exemption, dropping his taxable income to ₹14L and his base tax to ₹4.2L. A sharp difference — all due to route selection.

Bangar also flagged the Section 89(1) relief option — useful if you get a one-time lumpsum. “But Form 10E is mandatory,” he warned. And here’s the kicker: you can’t combine 10(10C) and 89(1) for the same payout. Pick one, crunch the math, and document it.

• His paperwork checklist was equally blunt:
• Get an HR breakup letter clearly showing notice vs severance/VRS
• Check Form 16, match with 26AS/AIS
• If claiming VRS, retain a copy of the scheme and a Rule 2BA compliance certificate

Also, don’t sleep on other exemptions: up to ₹20L on gratuity [Section 10(10)] and ₹25L on leave encashment (for non-govt employees).

Finally, Bangar reminded that under Section 10(10B), retrenchment compensation (not VRS) is also exempt up to ₹5L — but only if it meets Industrial Disputes Act conditions and isn’t a voluntary exit.