If you are planning to retire early through the Voluntary Retirement Scheme (VRS) then you can get a tax exemption of Rs 5 lakh, but any amount over will be taxed. On the flip side, severance pay received through VRS it is not taxable since it is considered a capital receipt. This is why it is crucial to grasp the difference between the two.
Recently there was a case in ITAT Pune involving an employee from a pharma company in Aurangabad. The company shut down, leading the employee to receive Rs 65 lakh for voluntarily retiring because of the closure. However, instead of treating it as capital receipt, the employee reported it for tax and claimed substantial relief under Section 89 for arrears or advance salary.
