Is Taking VRS The Right Move During Workforce Cuts?

Tata Motors offered voluntary retirement to around 750 permanent employees in a restructuring exercise after splitting into distinct passenger and commercial vehicle businesses in October 2025. After a persistent push from worker unions across factories, the company ran the voluntary retirement scheme (VRS) last month, from April 10 to April 30. However, of the eligible employees to whom it was offered, only around 300 employees opted for it.

The scheme was only for permanent staff in the 40 to 55-year age group. As per media reports, the company offered financial and medical support. But, while many companies are taking the layoffs route to restructure their workforce, if one offers a VRS, should one opt for it? Let’s understand.

How Does VRS Work?

VRS is a mechanism under which companies reduce their headcount through mutual agreement rather than layoffs or retrenchment. Mutual agreement is the keyword, as VRS is not forced. It, as the name suggests, is voluntary in nature. Companies pay the benefits in a lump sum, and exits happen amicably.

Like in the Tata Motors case, the company offered the VRS option with financial compensation and medical benefits. Notably, the programme was only for the permanent factory workers and not for all the employees.

Why Do Companies Offer VRS?

Companies typically offer VRS to reduce their workforce costs and restructure the organisation. Sometimes, they do it to manage surplus employees, and other times to restructure during mergers, demergers, automation, etc. The idea behind VRS remains providing a harmonious exit with compensation.

For employees, VRS usually offers a lump-sum payout and early retirement benefits, while for companies, it is a cleaner way to shrink headcount and improve efficiency.

Typically, an employee must be more than 40 years of age to be offered VRS. For central government employees, the minimum qualifying service is 20 years, but there is no single service-period rule for private companies.

What Does The VRS Compensation Include, And How Is It Calculated?

Anurag Jain, Partner, ByTheBook Consulting LLP, Gurgaon, explains, “A VRS (aka golden handshake scheme) payout generally comprises the ex gratia or severance compensation (the core VRS amount), accumulated provident fund balance, gratuity as per the Payment of Gratuity Act, 1972, leave encashment for unused earned leave, and in some cases, additional service-linked benefits. Each of these components has its own separate tax treatment under the Income Tax Act, 2025 (ITA).”

Jain clarifies that any compensation up to Rs 5 lakh received under voluntary retirement is exempted under Section 19(1) (Sr No. 12) of the Income-tax Act. “This means if your VRS package includes compensation up to Rs 5 lakh, you pay no tax on that portion. If the compensation exceeds Rs 5 lakh, only the excess is taxable, so if you receive Rs 8 lakh, Rs 5 lakh is tax-free, and the remaining Rs 3 lakh is taxed at your applicable income tax slab rate.”

However, it can be claimed only once in a lifetime. If you have claimed it already, you cannot claim it again for another VRS or termination package, he adds.

Should One Opt For VRS If Given An Option Amid Workforce Reduction?

Harendra Zatakia, CFP and Securities and Exchange Board of India (Sebi) - registered investment advisor (RIA), Wealth Aligned Financial Advisory, a financial planning firm, says, “From an employee’s perspective, VRS is usually considered the better option because it is voluntary and typically offers a higher payout than a standard layoff.”

He highlights the taxation part, saying that VRS could be more tax-efficient for employees. “Compensation received under an eligible VRS scheme can qualify for tax exemption under Section 10(10C) up to Rs 5 lakh, subject to conditions. Retrenchment compensation is covered separately under Section 10(10B). While exemptions are available here as well, the treatment can vary. In practice, compensation paid to senior management employees is often treated as profits in lieu of salary and may become fully taxable at applicable slab rates. This is one reason why VRS is generally considered a more tax-efficient route for many mid and senior-level professionals.”

Jain adds, “VRS packages are typically more generous than the statutory retrenchment formula. A well-negotiated VRS often includes ex gratia, full PF, gratuity, leave encashment, and even health insurance coverage for a transition period, far exceeding what a lay-off mandates.”

“From an employee’s perspective, VRS is usually considered the better option because it is voluntary and typically offers a higher payout than a standard layoff. While a layoff often provides only the minimum compensation required under law, a VRS package generally includes an additional ex gratia component to encourage voluntary exit, ” states Zatakia.

While companies plan to reduce the headcount, if VRS option is given, employees would better evaluate the offer. As Jain puts it, one, it attaches no reputational stigma, and two, it offers generous benefits.