The VRS exemption, and its conditions
If you take voluntary retirement or voluntary separation, Section 10(10C) exempts the compensation up to ₹5 lakh. The scheme has to meet prescribed conditions, broadly that you have completed 10 years of service or are 40 or older, that it applies across the workforce and results in a genuine reduction in headcount, and that the post is not filled and you are not re-employed in a group company.
Two limits are worth knowing. The ₹5 lakh exemption is a once-in-a-lifetime relief, so you cannot claim it again at a later employer. And you cannot take both the Section 10(10C) exemption and Section 89 spreading relief on the same compensation; you choose whichever leaves you better off. A practising CA runs both computations to see which serves you.
Leave encashment, and the higher limit
The encashment of your accumulated leave when you leave is exempt under Section 10(10AA). For a government employee it is fully exempt with no cap. For a non-government employee it is exempt up to a ceiling that was raised from ₹3 lakh, unchanged since 2002, to ₹25 lakh from 1 April 2023, a change that made a large difference to senior private-sector employees leaving with years of unused leave.
Within that ceiling, the actual exemption is the least of four figures: the ₹25 lakh limit, the leave encashment you actually received, ten months of your average salary, and the cash value of your unused leave counted at a maximum of 30 days per completed year of service. The ₹25 lakh is a lifetime aggregate across all employers, so past exemptions eat into it.
These work even once you are an NRI
A common worry is that becoming a non-resident changes or removes these exemptions. It does not. Both are exemptions on salary income, and salary for service rendered in India is Indian-source income, taxable in India even if it is paid to you after you have moved abroad. So whether you are still resident in the year you receive the payout or have already become non-resident, the same Section 10(10C) and Section 10(10AA) exemptions apply first, and only the amount above them is taxable.
On that taxable remainder, if any, whether your new country also taxes it and gives credit for the Indian tax is a separate treaty question that depends on where you have moved. A practising CA applies the exemptions, computes the taxable balance, and lines it up with your residential status for the year so the final settlement is taxed correctly and not more than it should be.