Most people in the workforce discuss their retirement goals and how they will navigate life after 60. But some people choose to opt for voluntary retirement.
While the usual age to retire is 60, an employee can choose to retire in their 40s and 50s. Organizations do this to reduce the number of employees and cut down their costs under the VRS scheme.
Read on to learn what is VRS and how it benefits the employees.
How Does a Voluntary Retirement Scheme Work?
Employees who have completed at least 10 years of service or are above the age of 40 are eligible for a vrs scheme. According to the guidelines, voluntary retirement should result in a net loss in existing staff strength, and the vacancy cannot be replaced. It applies to employees, corporate executives, and/or co-operative society authorities.
Knowing what is vrs helps, as it is used by many large corporate and public sector businesses. The law protects the employees from any chances of wrongful termination and keeps them in a protected space with many benefits. The Industrial Disputes Act of 1947, however, sets specific stipulations that all organisations must follow under the voluntary retirement system in order to ensure that no corporation abuses it.
Before granting voluntary retirement, PSUs must first acquire government approval. Firms can create their own schemes, but they must follow the requirements set forth in section 2BA of the Income-Tax Rules. One of the relevant rules specifies that a retiring employee may not work for another company under the same management.
Some standard things to keep in mind when reading what is vrs, Voluntary retirement is a method of reducing a company’s entire staff. As a result, the corporation will be unable to replace the retiring staff with new personnel.
Employees who choose voluntary retirement are not permitted to work for the same firm, its management, or a subsidiary company. They are allowed to seek employment elsewhere if they wish.
Also Read: Retirement planning
How Did Voluntary Retirement Scheme Start in India?
According to Indian labour laws, the retrenchment of employees isn’t allowed. The Industrial Disputes Act, 1947, restricts employers from cutting down excess staff by employee retrenchment. Any reduction in staff is, in fact, strongly opposed by trade unions. To overcome this issue, VRS was introduced as a legal solution. The Union did not oppose this scheme as retirement was voluntary and not compulsory.
When Can a Firm Opt for Voluntary Retirement Scheme?
Public and private sector firms can opt for VRS under a few circumstances –
- Mergers and takeovers
- Foreign collaborations
- Intense competition
- Obsolescence of product or technology
Features of VRS Scheme
Often understood as a seemingly harmless way to downsize within the company, there are some features that make the voluntary retirement scheme an attractive offer for those who take it:
- The vrs scheme includes a provident fund (PF) as well as a gratuity for the employee.
- Up to a certain sum, the voluntary retirement compensation paid to the employee is tax-free.
- Employees can choose from a variety of benefits such as counselling, rehabilitation, and other services to help them move smoothly into retirement.
- Companies in public and private sectors are the most common users of the scheme.
Also Read: Post Office Pension Scheme
What are the Benefits of VRS?
After understanding what is voluntary retirement scheme, one can note that the voluntary retirement scheme is meant to be designed towards mostly benefiting the departing employee, not just the organisation concerned. Let us look at some of the benefits of vrs which are as follows:
- It is a simple, practical, and compassionate way to let go of people and reduce an organization’s staff strength.
- Due to the nature of this scheme being voluntary, there are no complaints from trade unions.
- As the company’s human resource management must persuade trade unions of the importance of implementing voluntary retirement, the procedure is transparent and error-free.
- Voluntary retirement might help the organisation save money in the long run. When payroll expenditures are reduced, funds can be channelled to a variety of different processes, resulting in increased productivity.
- The procedure is completely free from discrepancies because the rules and regulations of the programme have been explicitly stated under the Industrial Disputes Act of 1947, and both the employee and the employer profit from it.
- The organisation provides rehabilitation services, such as training, to its employees in order to help them gain skills that can boost their employability. This will assist them in being able to find footing toward a new future.
What is VRS Eligibility Criteria?
Now that you know the benefits of vrs, let’s move towards the eligibility criteria. Since this scheme is designed toward a very specific part of the workforce, there are some standard criteria that a person needs to meet in order to avail their voluntary retirement benefits.
- The employee seeking voluntary retirement scheme benefits should be at least 40 years old.
- The employee should have spent at least ten years with the organisation.
- A company’s entire workforce may be covered by the scheme. Directors of a firm or a co-operative society are the only exceptions.
Also Read: Retirement Calculator
When is VRS Helpful?
VRS is helpful for the company when it wants to reduce the employment cost. On the other hand, this scheme is helpful for employees when they don’t have job satisfaction, want a break due to health issues or have a better opportunity in hand.
Did You Know?
One can predict if their company might begin efforts to find employees eligible for voluntary retirement or to downsize if the company is undergoing takeovers or mergers, facing a recession or has large numbers of obsolete products or tech on its hands.
What is the Compensation Under a Voluntary Retirement Scheme?
An important part of the voluntary retirement scheme calculation is the compensation provided. This compensation is based on the employee’s most recent salary slip. The employer is liable to pay the employee three months’ compensation for each year of service completed, or the employee’s income at the time of retirement will be multiplied by the number of months of service left before the initial retirement date. For employees at a public sector bank, the voluntary retirement compensation is based on 45 days of salary per year of service or the salary for the remaining term (lesser of the two).
While knowing what is vrs and how it works may be replete with many variables and company regulations, the bottom line is that it stands as a humane approach toward letting go of a workforce or employee that has served its maximum productivity. It benefits the organisation while also allowing the employee to transition into a new era of their lives with financial ease.
However, understanding how compensation is determined is necessary to ensure that one understands what they are getting into. Therefore, one should pay close attention to their compensation and know their benefits before theyf commit themselves to voluntary retirement.
The VRS salary consists of basic pay and DA only. The compensation paid under VRS includes an amount equal to three-month salary for each year of service. Alternatively, the compensation is calculated by multiplying the employee’s salary at the time of voluntary retirement with the number of months left for actual retirement date.
VRS is calculated on the basis of the last withdrawal salary. The amount equal to three month salary for each completed year of service is paid to the employee. Another method of VRS calculation is multiplying the employee’s salary with the remaining months left for actual retirement.
Yes, an employee can opt for the VRS scheme after completing 10 years of service.
To apply for VRS, you must have completed 10 years of service or should be above the age of 10 years.
Yes, VRS is a good option for employees who want to retire early due to financial or personal reasons. Besides receiving VRS salary, the employee also gets Provident Fund and Gratuity dues. Employees also get benefits like counselling sessions, rehabilitation facilities, etc.
There aren’t any additional benefits in case of voluntary retirement for Central Government employees. Pension is payable only after rendering 20 years of service or after the age of 50/55.
Read more about Voluntary Provident Fund Guide.