If you are wondering what VRS is, it is a scheme that allows companies to decrease their workforce by offering voluntary retirement to their employees. Some employees seek retirement at an early age, and the VRS scheme can be offered to those who have completed at least ten years of service and are older than 40.
What is VRS?
A Voluntary Retirement Scheme, also known as VRS, provides companies with the ability to offer voluntary retirement to their employees before they attain retirement age. While employees usually retire at the age of 58-60, VRS allows businesses to extend ‘early retirement’, either as a cost-cutting measure or to improve productivity.
We often hear about companies downsizing or laying off employees as a cost-cutting measure. In such situations, the voluntary retirement scheme enables companies to do what is required while also providing certain benefits to the employees. Furthermore, this method was introduced in India because the labour laws in the country do not permit the removal of unionised employees due to economic reasons.
While offering a degree of financial security, the lump-sum payout from a VRS needs careful management. Fixed deposits can be a prudent option to park a portion of these funds. Fixed deposit provide safe returns, helping preserve some of your VRS compensation while you strategize your next steps or generate income for early retirement.
Understanding how VRS works
Voluntary Retirement Schemes (VRS) let companies offer early retirement to employees with a financial incentive. Employees get a payout (often based on salary and years served) and may receive pension benefits or health insurance continuation. It's a trade-off: earlier freedom for potential income loss and reduced future pension.
Objectives of the VRS scheme
- Offer benefits to the company and its employees
- Letting long-serving employees take voluntary retirement, enjoy retirement benefits, and pursue other interests
- Help companies reduce overstaffing and employee costs while improving productivity
Why was the concept of VRS introduced in India
Under the Industrial Disputes Act, 1947, companies and employers are prohibited from reducing extra workforce through retrenchment. To resolve such issues amicably, the concept of a Voluntary Retirement Scheme was introduced in the country. This scheme addresses the concerns of both parties by allowing companies to reduce excess workforce while providing post-retirement benefits to the employees.
Moreover, as the name suggests, it is a ‘voluntary’ scheme, and the employees are not forced to choose retirement. For these reasons, this scheme did not receive any pushback or objections from trade unions.
Features of VRS
- For an employee to be eligible for VRS, they should have completed at least 10 years of service with the company and be older than 40.
- After applying for — and taking voluntary retirement, the company must clear all the due payments and provide the provident fund amount to the employee.
- The company must also offer assistance to the employees with regard to tax consultation and counselling, ensuring a smooth and hassle-free retirement process.
- Following the employee’s retirement via the VRS scheme, the company is prohibited from filling the vacancy.
- Once the employees opt for the voluntary retirement scheme, they cannot join a different company with the same management.
- Employees taking voluntary retirement through VRS can receive a compensation of up to Rs. 5 lakh. This amount is tax-free; however, to avail of this benefit, the employee must apply for VRS in the same year as they receive compensation.
