A golden handshake is a lump sum an employer pays to get an employee to leave early, either through a voluntary retirement scheme (VRS) offered to a group or a negotiated exit package for one senior person. It is paid over and above the normal exit dues such as gratuity and leave encashment, and its tax treatment depends heavily on which of those two routes is used.

VRS route: the Rs 5 lakh deduction

Compensation under a qualifying voluntary retirement or separation scheme gets a deduction of up to Rs 5,00,000. For FY 2025-26 this is Section 10(10C) of the 1961 Act with Rule 2BA; from tax year 2026-27 it is Section 19 (Table, serial 12) of the Income-tax Act, 2025, with Rule 20 of the Income-tax Rules, 2026. The scheme itself has to meet the rule’s conditions:

• Open to employees with 10 years of service or aged 40 (public sector voluntary separation schemes are exempt from this test).
• Applies to all employees, workers and executives alike, but not to directors.
• Leads to an overall cut in headcount, and the vacancies are not filled.
• The retiree is not re-employed by another company under the same management.
• The amount is capped at the lower of three months’ salary per completed year of service, or monthly salary times the months left to superannuation.

Example: salary (basic plus DA) Rs 80,000 a month, 20 completed years, 50 months to retirement. The caps are 3 x 20 x 80,000 = Rs 48,00,000 and 50 x 80,000 = Rs 40,00,000, so Rs 40,00,000 is the ceiling. A payout of Rs 18,00,000 is within it; Rs 5,00,000 is deducted and Rs 13,00,000 is taxed as salary. The deduction is available only once in a lifetime, and the 2025 Act’s new-regime exclusion list does not name it, so it appears to survive the default regime. If relief for arrears (old Section 89, now Section 157) is claimed on the same amount, the deduction is lost.

Negotiated exits outside a scheme

A one-off severance package for a single executive does not meet the “overall reduction” test, so it gets no Rs 5 lakh deduction. Compensation received on termination of employment is “profits in lieu of salary” (Section 17(3) of the 1961 Act, Section 18 of the 2025 Act) and is fully taxable through salary TDS. A garden leave period is often part of the deal.

Frequently asked questions

Is a golden handshake the same as retrenchment compensation?

No. Retrenchment compensation is a statutory minimum the employer must pay when it ends a worker’s job, while a golden handshake is a voluntary offer the employee can refuse.

Can a private company run a VRS?

Yes. The deduction covers employees of “any other company”, not just public sector undertakings, as long as the scheme meets every condition in the rules.

Do bank executives get golden handshakes?

RBI’s compensation framework for private and foreign bank whole-time directors and CEOs restricts severance pay beyond accrued benefits such as gratuity and pension, so large exit packages are uncommon there. Check the current RBI directions before structuring one.

The other exit payments that sit beside a handshake are worked through in our full and final settlement process guide, and leave encashment tax covers the leave piece.