BSNL VRS Compensation Fully Exempt Under Section 10(10B) & Revised Leave Encashment Ceiling Under Section 10(10AA) Applied Retrospectively — Bangalore ITAT
Background and Overview
The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) recently delivered a significant ruling in Vadone Krishnamurthy Rao Jamuna Vs ITO (ITAT Bangalore), allowing both appeals preferred by the assessee for Assessment Years 2020-21 and 2021-22. The decision addresses two substantive relief claims frequently arising in the context of BSNL's Voluntary Retirement Scheme of 2019 — namely, the exemption of ex gratia retrenchment compensation under Section 10(10B) of the Income Tax Act, 1961, and the retrospective applicability of the enhanced Rs. 25 lakh exemption ceiling under Section 10(10AA) for accumulated leave encashment.
The order, pronounced in open court on 31-Aug-2026, reinforces the consistent judicial position adopted by multiple Coordinate Benches across the country regarding the tax treatment of compensation received by BSNL employees who opted for the VRS-2019 package.
Factual Matrix
The Assessee's Employment and VRS Participation
The assessee was an employee of Bharat Sanchar Nigam Limited (BSNL), a public sector undertaking operating under the administrative oversight of the Department of Telecommunications, Government of India. When the Union Cabinet approved a comprehensive revival plan for BSNL and MTNL through an office memorandum dated 29.10.2019, workforce rationalisation formed a central pillar of that package. The Government introduced the BSNL Voluntary Retirement Scheme, 2019 ("BSNL VRS, 2019"), targeting employees aged 50 years and above, with ex gratia compensation payable upon voluntary retirement.
The assessee opted for this scheme and consequently received ex gratia compensation computed in accordance with the BSNL VRS, 2019, as follows:
- Assessment Year 2020-21: Rs. 12,55,224/-
- Assessment Year 2021-22: Rs. 27,55,075/-
Incorrect Exemption Claimed at the Return Stage
Due to inadequate legal advice, the assessee erroneously claimed exemption of Rs. 5 Lakhs under Section 10(10C) of the Income Tax Act, 1961 for AY 2020-21, rather than availing the applicable exemption under Section 10(10B). For AY 2021-22, no exemption whatsoever was claimed in the return filed. Both returns were processed through intimations issued under Section 143(1) of the Act, with no scrutiny assessment initiated.
Proceedings Before CIT(A)
The claim for exemption under Section 10(10B) — asserting that the entirety of the retrenchment compensation received from BSNL was not chargeable to tax — was raised for the first time before the learned Additional/Joint Commissioner of Income Tax (Appeals)-2, Coimbatore, in proceedings under Section 250 of the Income Tax Act, 1961. The impugned orders by the CIT(A), both dated 21.02.2026, dismissed the appeals solely on the ground of delay without examining or entertaining the fresh exemption claim on its merits.