Tax Exemption for BSNL VRS-2019: ITAT Pune Classifies Payout as Retrenchment Compensation Under Section 10(10B)

In a highly consequential ruling for former employees of Bharat Sanchar Nigam Limited (BSNL), the Income Tax Appellate Tribunal (ITAT), Pune Bench, has delivered a definitive judgment regarding the taxability of compensation received under the BSNL Voluntary Retirement Scheme 2019 (BSNL VRS-2019). The Tribunal, in the case of Vikas Vasant Tol Vs ITO (ITA No. 1563/PUN/2026), pronounced on 25/08/2026, determined that the ex-gratia payments made to employees under this specific revival package qualify as retrenchment compensation. Consequently, such receipts are capital in nature and are fully exempt from taxation under Section 10(10B) of the Income Tax Act 1961, rather than being restricted to the ₹5 lakh exemption limit prescribed under Section 10(10C).

This comprehensive analysis delves into the factual background, the procedural hurdles involving appellate delays, the intricate legal distinctions between statutory exemptions, and the extensive jurisprudential backing that led the ITAT Pune to this conclusion for the assessment years 2020-21 and 2021-22.

The Genesis of the Dispute: BSNL VRS-2019

As part of a strategic revival and restructuring package initiated by the Government of India, BSNL introduced a voluntary retirement scheme aimed at reducing its workforce. The scheme, known as BSNL VRS-2019, was offered to employees aged 50 years and above. Upon opting for this forced retirement framework, the departing employees received substantial ex-gratia compensation packages.

The primary tax controversy arose when these former employees began filing their income tax returns for the relevant assessment years. Due to a prevailing lack of clarity and initial professional advice, many employees, including the assessee in the present appeals, categorized this payout under Section 10(10C) of the Income Tax Act 1961. This specific section provides an exemption for amounts received upon voluntary retirement, but it strictly caps the allowable exemption at ₹5 lakh. Consequently, the employees paid applicable taxes on the remainder of the compensation that exceeded this statutory threshold.

Factual Matrix of the Present Appeals

The appeals before the ITAT Pune, encompassing ITA No. 1563/PUN/2026 and related matters, pertained to the assessment years 2020-21 and 2021-22.

The assessee, an ex-employee of BSNL, had initially filed the return of income offering the VRS compensation to tax after claiming the restricted exemption of ₹5 lakh under Section 10(10C). However, upon becoming aware of emerging legal interpretations by various appellate tribunals—which classified such forced retirement payouts as retrenchment compensation—the assessee sought to revise the claim.

During the appellate proceedings before the Additional/Joint Commissioner of Income Tax (Appeals) [Addl./JCIT(A)], the assessee introduced a fresh legal claim. The core argument was that the entire compensation amount constituted a capital receipt, which should be entirely exempt from income tax under the provisions of Section 10(10B) of the Income Tax Act 1961.