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Managing a Business
Managing Human Resource: Employee Benefits:
Voluntary Retirement Scheme (VRS)
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In the present globalised scenario, right sizing of the manpower employed in an organisation has become an important management strategy in order to meet the increased competition. The voluntary retirement scheme(VRS) is the most humane technique to provide overall reduction in the existing strength of the employees. It is a technique used by companies for trimming the workforce employed in the industrial unit. It is now a commonly method used to dispense off the excess manpower and thus improve the performance of the organisation. It is a generous,tax-free severance payment to persuade the employees to voluntarily retire from the company. It is also known as 'Golden Handshake' as it is the golden route to retrenchment.

In India, the Industrial Disputes Act,1947 puts restrictions on employers in the matter of reducing excess staff by retrenchment, by closures of establishment and the retrenchment process involved lot of legalities and complex procedures. Also, any plans of retrenchment and reduction of staff and workforce are subjected to strong opposition by trade unions. Hence, VRS was introduced as an alternative legal solution to solve this problem. It allowed employers including those in the government undertakings, to offer voluntary retirement schemes to off-load the surplus manpower and no pressure is put on any employee to exit. The voluntary retirement schemes were also not subjected to not vehement opposition by the Unions, because the very nature of its being voluntary and not using any compulsion. It was introduced in both the public and private sectors. Public sector undertakings, however, have to obtain prior approval of the government before offering and implementing the VRS.

A business firm may opt for a voluntary retirement scheme under the following circumstances:-

  • Due to recession in the business.

  • Due to intense competition, the establishment becomes unviable unless downsizing is resorted to.

  • Due to joint-ventures with foreign collaborations.

  • Due to takeovers and mergers.

  • Due to obsolescences of Product/Technology.

Though the eligibility criteria for VRS varies from company to company, but usually, employees who have attained 40 years of age or completed 10 years of service are eligible for voluntary retirement.The scheme applies to all employees including workers and executives, except the directors of a company. The employee who opts for voluntary retirement is entitled to get forty five days emoluments for each completed year of service or monthly emoluments at the time of retirement multiplied by the remaining months of service before the normal date of service,whichever is less. Along with these benefits, the employees also get their provident fund and gratuity dues. Compensation received at the time of voluntary retirement is exempt from tax under section 10 (10C) of the Income Tax Act, 1961 upto the prescribed amount upon fulfilling certain stipulated conditions. However,the retiring employee should not be employed in another company or concern belonging to the same management.

The companies can frame different schemes of voluntary retirement for different classes of their employees. However, these schemes have to conform to the guidelines prescribed in rule 2BA of the Income-tax Rules. The guidelines for the purposes of section 10( 10C ) of the Income-tax Act have been laid down in the rule 2BA of the Income-tax Rules. The guidelines provide that the scheme of voluntary retirement framed by a company should be in accordance with the following requirements, namely :

  • It applies to an employee of the company who has completed ten years of service or completed 40 years of age

  • It applies to all employees (by whatever name called), including workers and executives of the company excepting Directors of the company

  • The scheme of voluntary retirement has been drawn to result in overall reduction in the existing strength of the employees of the company

  • The vacancy caused by voluntary retirement is not to be filled up, nor the retiring employee is to be employed in another company or concern belonging to the same management

  • The amount receivable on account of voluntary retirement of the employees, does not exceed the amount equivalent to one and one-half months salary for each completed year of service or monthly emoluments at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. In any case, the amount should not exceed rupees five lakhs in case of each employee, and

  • The employee has not availed in the past the benefit of any other voluntary retirement scheme.

Some companies offers very attractive package of benefits to the employees who opt for VRS. For example, the VRS scheme may also include providing counselling to employees about their future;managing of funds received under the scheme; offering rehabilitation facilities to them,etc.

A company may make the following announcements while implementing a voluntary retirement scheme:-

  • The reasons behind downsizing the organisation.

  • The eligibility criteria for voluntary retirement scheme.
  • The age limit and the minimum service period of employees who can apply for the scheme.

  • The benefits that are offered to the employees who offer to retire voluntarily.

  • The rights of the employer to accept or reject any application for voluntary retirement.

  • The date up to which the scheme is open.

  • The income tax benefits and income tax incidence related to the scheme.

  • It should also indicate that the employees who opt for voluntary retirement and accept the benefits under such scheme shall not be eligible in future for employment in the organisation.

Voluntary Retirement Schemes have been legally found to be giving no problem to employers, employees and their unions. But, the retrenchment plans of an organization must be compatible to its strategic plans. Its procedure and reasons for introduction must be discussed with all management staff including top management. One need to identify departments or employees to whom VRS is applicable and thereby formulate its terms and conditions and also state the benefits that would be available to those who took VRS. Such information should be made available to every employee of the organization, mentioning the period during which the scheme will be open. Also,existing employees might face insecurity because of fear of losing their job too. One of the possible drawback of the VRS is that the efficient employees would leave the company while the inefficient may stay back. Thus it is the /responsibility of the employer to motivate them and remove their apprehensions and fears

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