BSNL and MTNL VRS 2019 ex-gratia tax: CBDT says only ₹5 lakh is tax-free
CBDT's 22 October 2026 order says BSNL and MTNL VRS-2019 ex-gratia is voluntary retirement pay under section 10(10C), not retrenchment pay.
Many BSNL and MTNL employees who took voluntary retirement in 2019 have argued that their ex-gratia is fully tax-free. Some won at the Income Tax Appellate Tribunal (ITAT). The Central Board of Direct Taxes (CBDT) has now set out the tax department's position in an order dated 22 October 2026, and it goes against that claim. Here is what the order says and what it means if you are one of these retirees.
What CBDT decided
CBDT received representations from retiree associations and individuals asking whether the ex-gratia under the BSNL and MTNL Voluntary Retirement Scheme, 2019 (VRS-2019) is covered by section 10(10B) of the Income-tax Act, 1961. That section deals with retrenchment compensation.
After consulting the Department of Telecommunications, CBDT said the payment is compensation for voluntary retirement. Its reasons:
- Employees chose the scheme themselves by filling in an option form within the set period.
- The ex-gratia was worked out from the years of service completed and the service left until retirement age, in line with the Department of Public Enterprises guidelines of 20 July 2018 for VRS.
- Retirees still get their pension and other retirement benefits under the pension rules.
- The scheme was meant to reduce staff numbers. It did not end anyone's service against their will.
So, the order says, the ex-gratia is governed by section 10(10C), which covers voluntary retirement, and not by section 10(10B).
Why this matters for the tax you pay
Under section 10(10C), the tax-free part of voluntary retirement compensation is the lower of the amount received and ₹5 lakh, according to the Income Tax Department. It is a one-time exemption in a lifetime. Anything above that is taxed as salary income. If you claim this exemption, you cannot also claim relief under section 89 for the same payment.
Retiree associations had asked CBDT to allow full exemption under section 10(10B) without the ₹5 lakh limit. Their letters relied on ITAT rulings, such as the Chandigarh bench order of 30 May 2025 in the case of a BSNL retiree, which treated the scheme as retrenchment and the ex-gratia as fully exempt. Those rulings in turn relied on a 2017 Madras High Court decision about Hindustan Photo Films.
CBDT said that case was different. Hindustan Photo Films was being wound up, and the court found its package was really a severance package. In the BSNL and MTNL case, CBDT says, employees opted in voluntarily and nobody challenged the schemes in court as retrenchment.
What CBDT told its officers
- Use this position before the ITAT and the courts, through the department's representatives and standing counsel.
- Decide condonation requests from retirees who want to revise old returns to claim the ex-gratia under section 10(10B) on this basis. Such requests are made under section 119 of the 1961 Act or section 239 of the Income-tax Act, 2025.
What it means for you
- If you have not claimed full exemption: expect the department to allow only up to ₹5 lakh as tax-free and to reject a late request to revise your return on the retrenchment ground.
- If your claim is pending in appeal: the department will now oppose it with this order. The final word rests with the tribunal or court hearing your case.
- If you already won at the ITAT: this order is the department's stand, not a court ruling, and it does not by itself undo a tribunal order. Whether the department appeals depends on its own rules on appeals. Keep your order and refund papers safe.
The order is about BSNL and MTNL VRS-2019 only. It does not change the tax rules for other voluntary retirement schemes. Saifu is not a tax adviser. If you have a case pending or a large amount at stake, speak to a chartered accountant or tax lawyer.
Sources: StaffNews: CBDT order of 22 October 2026 on BSNL and MTNL VRS-2019 ex-gratia (full text), CAclubindia: CBDT clarifies tax treatment of BSNL and MTNL VRS-2019 compensation, 24 October 2026, Income Tax Department: Taxability of retirement benefits, Income Tax Department: Exempt income, Retired Telecom Officers' Welfare Association: letter to CBDT, 18 September 2025.
Rules, rates and limits change. Check the official source linked above before you rely on a figure here. Posts never contain referral or affiliate links from the writer.
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