Rule 20 — Procedure for purposes of section 19 [Table: Sl. No. 12] relating to voluntary retirement or voluntary separation. Made under s.19 of the Income-tax Act, 2025.
Rule 20 gives effect to Section 19 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
Sub-rule (1) identifies whose payment can qualify. The amount received at the time of voluntary retirement or voluntary separation may be claimed as a deduction for the purposes of section 19 [Table: Sl. No. 12] by an employee of a public sector company, any other company, an authority established under a Central, State or Provincial Act, a local authority, a co-operative society, a University established or incorporated by or under such an Act or declared to be a University under section 3 of the University Grants Commission Act, 1956, an Indian Institute of Technology within clause (g) of section 3 of the Institutes of Technology Act, 1961, an institution of importance throughout India or in any State or States as notified by the Central Government, or such other institute of management as the Central Government may notify. The claim is subject to the conditions in sub-rules (2) and (3).
Sub-rule (2) sets six requirements the scheme itself must satisfy. It must apply to an employee who has completed ten years of service or completed forty years of age. It must apply to all employees, by whatever name called, including workers and executives, excepting directors of a company or of a co-operative society. It must be drawn to result in an overall reduction in the existing strength of the employees. The vacancy caused is not to be filled up. The retiring employee of a company shall not be employed in another company or concern belonging to the same management. And the amount receivable must not exceed either A or B, where A = 3 x N x S and B = M x S, N being the number of completed years of service, M the balance months of service left before the date of retirement on superannuation and S the salary at the time of retirement.
Sub-rule (3) removes one of those requirements in one case: where an amount is received by an employee of a public sector company under that company's scheme of voluntary separation, the service or age condition in sub-rule (2)(i) does not apply.
Sub-rule (4) defines "salary" for this rule as including dearness allowance if the terms of employment so provide, but excluding all other allowances and perquisites.
Section 19 allows the deduction for a voluntary retirement receipt but does not say what a genuine voluntary retirement scheme looks like. Without that, an ordinary termination payment, or a payment dressed as retirement to an employee who is rehired next door, would carry the same relief. The rule supplies the marks of a real scheme — a service or age qualification, coverage of all employees, an actual reduction in strength, the post kept vacant, no re-employment within the same management — and caps the qualifying amount by a formula tied to service already rendered or service that would have been rendered.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Service qualification for coverage by the scheme | Ten years of service completed | Alternative to the age test; not applicable to a public sector company's voluntary separation scheme by virtue of sub-rule (3) | Sub-rule (2)(i) |
| Age qualification for coverage by the scheme | Forty years of age completed | Alternative to the service test; not applicable to a public sector company's voluntary separation scheme by virtue of sub-rule (3) | Sub-rule (2)(i) |
| First ceiling on the amount receivable | A = 3 x N x S | N is the number of completed years of service and S the salary at the time of retirement; the amount receivable must not exceed either A or B | Sub-rule (2)(vi) |
| Second ceiling on the amount receivable | B = M x S | M is the balance months of service left before the date of retirement on superannuation and S the salary at the time of retirement | Sub-rule (2)(vi) |
The rule governs the scheme, not the sum allowed. What may be deducted under section 19 [Table: Sl. No. 12] is fixed by the Act; this rule only decides whether the receipt is of a kind that can be claimed at all, and it does so by testing the scheme against six requirements that must all hold. The formula in sub-rule (2)(vi) is a limit on the amount receivable under the scheme, not a computation of relief: an amount exceeding both A and B breaks the scheme condition rather than merely reducing a deduction. Salary for the formula is a narrow figure — basic salary plus dearness allowance only if the terms of employment so provide, with all other allowances and perquisites excluded by sub-rule (4). Two conditions bind after the employee has gone: the vacancy is not to be filled up, and a retiring employee of a company must not be employed in another company or concern belonging to the same management. The only relaxation anywhere in the rule is the narrow one in sub-rule (3), and it is confined to a public sector company's scheme of voluntary separation.
An employee of a company retires at 52 under its voluntary retirement scheme after 22 completed years of service, with eight years, that is 96 months, left to superannuation. His salary at retirement, basic plus dearness allowance provided for in his terms of employment, is Rs 60,000 a month. A works out to 3 x 22 x 60,000 = Rs 39,60,000 and B to 96 x 60,000 = Rs 57,60,000, and the scheme must not offer him more than either of these. If the company fills his post the following year, the scheme fails sub-rule (2)(iv), and if it takes him on in an associate concern under the same management it fails sub-rule (2)(v).
An employee meets it in the terms of the voluntary retirement or voluntary separation scheme offered to him and in the computation shown on his final settlement and Form 16. The Assessing Officer meets it when testing a section 19 claim on the return against the scheme document the employer framed.
the scheme applies to an employee who has completed ten years of service or completed forty years of age
the retiring employee of a company shall not be employed in another company or concern belonging to the same management
the amount receivable on account of voluntary retirement or voluntary separation of the employee does not exceed either A or B