The Central Board of Direct Taxes (CBDT) has clarified that ex-gratia compensation received by employees under the BSNL and MTNL Voluntary Retirement Scheme, 2019, is governed by Section 10(10C) of the Income-tax Act, 1961, and does not qualify for treatment under Section 10(10B), which concerns retrenchment compensation.

In a communication addressed to all Principal Chief Commissioners and Principal Directors General of Income-tax, the Board set out the department’s position on exemption claims arising from the two telecom companies’ retirement schemes. The clarification follows representations from retired employees and associations seeking exemption under Section 10(10B). 

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Dispute Over Classification Of Ex-Gratia Payments

The central issue is whether the ex-gratia payments made under BSNL and MTNL VRS-2019 should be treated as compensation for voluntary retirement or as retrenchment compensation.

The Board stated that it examined the matter in consultation with the Department of Telecommunications. Referring to the department’s office memorandum dated April 8, 2026, the CBDT said the payments were in the nature of compensation received on voluntary retirement.

Accordingly, the Board concluded that the applicable provision is Section 10(10C). Its communication rejects the claim that these payments fall within Section 10(10B). The clarification concerns the provision governing the compensation; it does not declare the entire ex-gratia payment exempt from tax.

Employees Voluntarily Opted For Retirement

Explaining its position, the CBDT emphasised that the schemes were expressly framed as voluntary retirement schemes. Eligible employees were required to exercise their option within a prescribed period, and they voluntarily submitted the option forms to obtain the benefits.

The Board also noted that the compensation was calculated with reference to the employee’s completed qualifying service and the period of service remaining until superannuation. According to the communication, this broadly followed the Department of Public Enterprises’ guidelines dated July 20, 2018, governing voluntary retirement schemes.

It referred to BSNL’s circular and MTNL’s office order, both dated November 4, 2019, through which the schemes and their guidelines were circulated. The model adopted under VRS-2019 followed paragraph 3 of the relevant Department of Public Enterprises guidelines.

Another factor cited was the continued entitlement of participating employees to pensionary and other retirement benefits under the applicable rules, including the Central Civil Services (Pension) Rules.

The Board stated that the schemes were formulated to rationalise and right-size the workforce and did not contemplate termination of service by the employer. These features, in its assessment, supported the classification of the payments as voluntary retirement compensation. HVPxENdacAAgiF4

CBDT Distinguishes Madras High Court Decision

The communication also addresses reliance on the Madras High Court’s March 17, 2017 decision in Hindustan Photo Film Workers Welfare Centre, W.P. No. 18566 of 2015.

The CBDT observed that Income Tax Appellate Tribunals had relied on that judgment while allowing appeals by assessees. However, the Board distinguished the circumstances of that case from those of BSNL and MTNL VRS-2019.

According to the Board’s account, the Hindustan Photo Films dispute involved the winding up of the company. Employees contested both the amount of compensation and whether the arrangement was a severance package or a voluntary retirement scheme. The employer was a principal party to that dispute.

The CBDT stated that the High Court treated the package as severance of employment rather than a VRS package, including for income-tax purposes.

In contrast, the Board said BSNL and MTNL employees voluntarily exercised their options under the 2019 schemes. It further stated that employees had not challenged those schemes before a court to establish that they were retrenchment schemes rather than voluntary retirement schemes.

Departmental Representatives And Standing Counsel To Be Informed

The CBDT has directed that its position be brought to the attention of officers across income-tax regions, including departmental representatives and standing counsel appearing before courts and Income Tax Appellate Tribunals.

It has also asked that courts and tribunals be informed about the voluntary submission of option forms by employees and the factual distinctions identified between these schemes and the Hindustan Photo Films case.

The communication therefore sets out the position the department intends to present in disputes over claims for exemption under Section 10(10B). It does not itself overturn any judicial decision.

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