Draft Income-tax Rules 2026: Gross Total Income Limit & VRS Deduction Conditions under Rules 19 and 20

The Draft Income-tax Rules, 2026 propose two important provisions that directly impact the tax treatment of certain employment-related receipts:

  • Rule 19 – prescribing the gross total income cap for the purpose of section 17(3)(b) of the Income Tax Act 1961; and
  • Rule 20 – laying down eligibility conditions and computation norms for claiming deduction on amounts received under voluntary retirement or voluntary separation schemes in terms of section 19 (Table: Sl. No. 12).

These rules are intended to bring clarity and uniformity in how voluntary retirement scheme (VRS) and voluntary separation scheme (VSS) benefits are handled for tax purposes, and who can avail the related deduction.

Scope and Objective of Rules 19 and 20

Rule 19 – Gross Total Income Ceiling under Section 17(3)(b)

Rule 19 of the Draft Income-tax Rules, 2026 specifies the prescribed gross total income limit for the purpose of section 17(3)(b) of the Income Tax Act 1961.

  • The draft rule fixes this limit at ₹8,00,000.
  • This threshold acts as a reference cap when determining the taxability of certain components of income classified under section 17(3)(b), which deals with specified profits in lieu of salary.

In simple terms, for the specific operation of section 17(3)(b), the assessee’s gross total income is treated as ₹8,00,000, as prescribed by Rule 19.

Rule 20 – Framework for Deduction on Voluntary Retirement or Separation

Rule 20 is more elaborate and provides guidelines that govern when and how an assessee can claim a deduction for sums received on:

  • Voluntary retirement, or
  • Voluntary separation

under section 19 (Table: Sl. No. 12).

The rule:

  1. Specifies who can claim the deduction (eligible employers and their employees);
  2. Sets out mandatory conditions the scheme must satisfy;
  3. Prescribes monetary limits on the compensation amount; and
  4. Clarifies the meaning of “salary” for computation purposes.

Who Is Covered Under Rule 20?

Eligible Employers and Employees – Sub-rule (1)

Under Rule 20(1), an assessee can claim deduction on the amount received at the time of voluntary retirement or voluntary separation if the assessee is an employee of any of the following entities:

  1. Public sector company; or
  2. Any other company; or
  3. Authority established under a Central, State or Provincial Act; or
  4. Local authority; or
  5. Co-operative society; or
  6. University established or incorporated by or under a Central, State or Provincial Act, and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or
  7. Indian Institute of Technology within the meaning of clause (g) of section 3 of the Institutes of Technology Act, 1961 (59 of 1961); or
  8. Institution of national or State importance, as may be notified by the Central Government in the Official Gazette; or
  9. Specified institute of management, as may be notified by the Central Government in the Official Gazette.

The deduction is available only if:

  • The amount is received “at the time of” voluntary retirement or voluntary separation; and
  • The receipt is in accordance with a qualifying scheme that satisfies all the conditions in Rule 20(2) (with one specific relaxation for public sector company employees as per Rule 20(3)).

Essential Conditions for VRS/VSS Deduction – Sub-rule (2)

For an assessee to claim deduction under Rule 20(1), the underlying scheme must conform to strict criteria laid down in Rule 20(2). The rule uses the collective term “the scheme” to refer to: