The Central Board of Direct Taxes (CBDT), Ministry of Finance, Department of Revenue, Government of India, has issued an important clarification vide F. No. 173/32/2026-ITA-I dated October 22, 2026, regarding the income-tax treatment of ex-gratia compensation received by employees of Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) under the Voluntary Retirement Scheme, 2019 (VRS-2019).
The clarification addresses representations received from various associations and retired employees seeking exemption of the ex-gratia compensation under Section 10(10B) of the Income-tax Act, 1961, which deals with retrenchment compensation.
After examining the matter in consultation with the Department of Telecommunications (DoT), CBDT has clarified that compensation received under BSNL and MTNL VRS-2019 is in the nature of voluntary retirement compensation, governed by Section 10(10C), and not retrenchment compensation under Section 10(10B).
Ex-Gratia Compensation under VRS-2019 Covered by Section 10(10C)
CBDT has categorically clarified that the ex-gratia amount received by employees opting for voluntary retirement under BSNL and MTNL VRS-2019 falls within the scope of Section 10(10C) of the Income-tax Act, 1961.
Accordingly, such compensation is not covered under Section 10(10B), which provides exemption for qualifying retrenchment compensation.
This clarification is significant for retired BSNL and MTNL employees who have sought tax relief or filed appeals claiming exemption under the provisions relating to retrenchment compensation.
Voluntary Nature of Retirement Scheme Emphasised
CBDT has observed that VRS-2019 was expressly formulated as a Voluntary Retirement Scheme, under which eligible employees were required to exercise their option for retirement within a prescribed period.
Employees voluntarily submitted option forms to avail themselves of the scheme’s benefits.
The Board has therefore emphasised that the compensation was paid on account of voluntary retirement rather than compulsory termination or retrenchment by the employer.
This distinction forms the principal basis for determining the appropriate income-tax exemption provision.
Compensation Linked to Qualifying Service and Remaining Service Period
CBDT has further clarified that the ex-gratia compensation under VRS-2019 was calculated with reference to the completed qualifying service and the residual period of service remaining until superannuation.
The compensation framework broadly followed the guidelines issued by the Department of Public Enterprises (DPE) dated July 20, 2018, governing Voluntary Retirement Schemes.
The scheme adopted by BSNL and MTNL was also consistent with their respective circulars and office orders dated November 4, 2019.
The structure and methodology of compensation further establish its character as a voluntary retirement benefit.
Continuation of Pension and Other Retirement Benefits
An important consideration highlighted by CBDT is that employees opting for retirement under VRS-2019 continued to remain entitled to pensionary and other retirement benefits under the applicable rules, including the Central Civil Services (Pension) Rules.
CBDT also noted that VRS-2019 was introduced with the objective of rationalising and right-sizing the workforce.
The scheme did not contemplate termination of employees’ services by the employer.
These features distinguish the scheme from a retrenchment or severance arrangement.
CBDT Distinguishes Madras High Court Ruling in Hindustan Photo Film Case
CBDT has also examined the reliance placed by Income Tax Appellate Tribunals on the judgment of the Madras High Court dated March 17, 2017, in the case of Hindustan Photo Film Workers Welfare Centre (W.P. No. 18556 of 2015).
The Board observed that the circumstances of the Hindustan Photo Film case were materially different.
In that matter, the employer was being wound up, and the compensation package was offered in the context of severance of employment. Accordingly, the High Court treated the payment as a severance package rather than a VRS package for income-tax purposes.
In contrast, BSNL and MTNL VRS-2019 involved voluntary retirement through options exercised by employees, and the schemes were not introduced as employer-driven retrenchment arrangements.
Therefore, CBDT has clarified that the reasoning applicable to the Hindustan Photo Film case should not be automatically extended to compensation paid under BSNL and MTNL VRS-2019.
Income Tax Authorities Directed to Bring Clarification to Notice of Courts and Tribunals
CBDT has advised that its position be communicated to officers across the field formations, including Departmental Representatives and Standing Counsels appearing before Income Tax Appellate Tribunals and Courts.
It has further indicated that relevant judicial authorities may be apprised of the voluntary nature of BSNL and MTNL VRS-2019, including the fact that employees exercised their retirement options voluntarily and that the schemes were not challenged as retrenchment arrangements in any court of law.
This clarification is expected to provide greater consistency in the Department’s approach to litigation concerning the tax treatment of VRS-2019 compensation.
Pending Appeals and Condonation Applications to Be Considered Expeditiously
In an important direction concerning affected employees, CBDT has stated that applications for condonation of delay filed by assessees seeking revision of Income Tax Returns to claim benefits under Section 10(10C), read with Section 119 of the Income-tax Act, 1961 / Section 239 of the Income-tax Act, 2025, may be dealt with expeditiously.
This direction assumes significance for retired employees who may have claimed exemption under an incorrect provision or who wish to seek revision of their earlier income-tax treatment.
However, eligibility for relief will remain subject to the applicable statutory conditions and consideration by the competent income-tax authorities.
Important Implications for BSNL and MTNL Retired Employees
The clarification provides much-needed certainty regarding the appropriate statutory provision governing ex-gratia payments under VRS-2019.
Employees who have received such compensation may examine their eligibility for exemption under Section 10(10C), subject to the conditions and monetary limits prescribed under the Income-tax Act.
Importantly, Section 10(10C) provides an exemption of up to ₹5 lakh, subject to fulfilment of the applicable statutory requirements. The CBDT communication clarifies the nature of compensation but does not provide an unrestricted exemption of the entire VRS amount.
Affected employees may also evaluate available remedies in respect of pending appeals, refund claims and applications for condonation of delay, depending upon the facts of their cases.
Key Takeaway
The CBDT clarification brings significant clarity to the long-standing controversy surrounding the income-tax treatment of ex-gratia compensation paid to BSNL and MTNL employees under VRS-2019.
By recognising the compensation as a voluntary retirement benefit governed by Section 10(10C), rather than retrenchment compensation under Section 10(10B), the Board has clarified the Department’s position and provided guidance for uniform treatment of related claims and litigation.
The direction for expeditious consideration of condonation applications is particularly relevant for eligible retired employees seeking to claim the applicable income-tax exemption.
The Order can be accessed at: https://a2ztaxcorp.net/wp-content/uploads/2026/10/CBDT-1.pdf
