Section 35DDA: Amortisation of Expenditure under a Voluntary Retirement Scheme
Section 35DDA of the Income-tax Act, 1961 provides for spreading qualifying employer payments under a voluntary retirement scheme (VRS) over five previous years. It also regulates the remaining deductions when a business is transferred through specified reorganisations.
What is Section 35DDA?
Voluntary retirement scheme (VRS) means an employer's scheme under which employees voluntarily leave employment in return for payments according to the scheme's terms. Under section 35DDA(1), the employer's qualifying expenditure paid in connection with voluntary retirement is deducted for business tax purposes over five years.
Amortisation means allocating a single qualifying expense over a prescribed number of years instead of claiming it entirely in one year. A previous year under the 1961 Act is the financial year in which the relevant income or expenditure arises; the assessment year is the following year.
The section refers to an assessee, not only to companies. It is distinct from an employee's possible exemption for VRS receipts under section 10(10C), which has separate eligibility requirements.
How is the five-year VRS deduction calculated?
The employer may deduct one-fifth (20%) of the qualifying payment in the previous year of expenditure and one-fifth in each of the next four previous years, subject to the applicable law.
| Previous year | Illustration: VRS expenditure of Rs. 10,00,000 |
|---|---|
| Year of qualifying expenditure | Rs. 2,00,000 |
| Following year 1 | Rs. 2,00,000 |
| Following year 2 | Rs. 2,00,000 |
| Following year 3 | Rs. 2,00,000 |
| Following year 4 | Rs. 2,00,000 |
| Total | Rs. 10,00,000 |
This is a simplified illustration; it does not determine the tax treatment of a particular payment or the effect of a reorganisation.
What happens after amalgamation, demerger or succession?
Amalgamation: When a qualifying Indian company's undertaking is transferred to another Indian company under a scheme of amalgamation before the five-year period expires, section 35DDA(2) permits the amalgamated company to continue the deduction, subject to the statutory conditions.
Demerger: Section 35DDA(3) provides for continuation by the resulting company when the undertaking is transferred under a qualifying scheme of demerger.
Conversion to a company: Under section 35DDA(4), a successor company may continue the deduction on qualifying succession of a firm or proprietorship, with conditions cross-referenced to section 47(xiii) and (xiv).
Conversion to an LLP: Section 35DDA(4A) addresses qualifying succession of a private company or unlisted public company by a limited liability partnership, referring to section 47(xiiib).
Preventing duplicate deductions: Section 35DDA(5) bars the transferor from claiming the deduction in the transfer year in specified cases; section 35DDA(6) disallows claiming the same expenditure under another provision of the 1961 Act.
Section 35DDA(1) to (6): statutory provisions explained
The following reproduces the substantive wording of the provisions from the original article, organised by subsection. Historical footnote markers have been removed for readability; amendment references are preserved below.
35DDA(1) - Five-year amortisation
Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee in connection with his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, one-fifth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years.
35DDA(2) - Amalgamation
Where the assessee, being an Indian company, is entitled to the deduction under sub-section (1) and the undertaking of such Indian company entitled to the deduction under sub-section (1) is transferred, before the expiry of the period specified in that sub-section, to another Indian company in a scheme of amalgamation, the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place.
35DDA(3) - Demerger
Where the undertaking of an Indian company entitled to the deduction under sub-section (1) is transferred, before the expiry of the period specified in that sub-section, to another company in a scheme of demerger, the provisions of this section shall, as far as may be, apply to the resulting company, as they would have applied to the demerged company, if the demerger had not taken place.
35DDA(4) - Firm or proprietorship succession
Where there has been reorganisation of business, whereby a firm is succeeded by a company fulfilling the conditions laid down in clause (xiii) of section 47 or a proprietary concern is succeeded by a company fulfilling the conditions laid down in clause (xiv) of section 47, the provisions of this section shall, as far as may be, apply to the successor company, as they would have applied to the firm or the proprietary concern, if reorganisation of business had not taken place.
35DDA(4A) - Company to LLP succession
Where there has been reorganisation of business, whereby a private company or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of section 47, the provisions of this section shall, as far as may be, apply to the successor limited liability partnership, as they would have applied to the said company, if reorganisation of business had not taken place.
35DDA(5) - No duplicate deduction in transfer year
No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) in the case of the amalgamating company referred to in sub-section (2), in the case of demerged company referred to in sub-section (3), in the case of a firm or proprietary concern referred to in sub-section (4) and in the case of a company referred to in sub-section (4A) of this section, for the previous year in which amalgamation, demerger or succession, as the case may be, takes place.
35DDA(6) - Exclusivity of deduction
No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act.
Legislative history and amendment references
- Section 35DDA inserted by the Finance Act, 2001 (Act 14 of 2001), section 24, with effect from 1 April 2001.
- Wording in subsection (1) amended by Act 18 of 2005, section 11, with effect from 1 April 2004, replacing the earlier phrase concerning payment at the time of voluntary retirement.
- Subsection (2) substituted by Act 20 of 2002, section 18, with effect from 1 April 2001.
- Subsection (4A) inserted by Act 14 of 2010, section 11, with effect from 1 April 2011.
- Subsection (5) amended by Act 14 of 2010, section 11, with effect from 1 April 2011, to address the additional succession case.
Official legislation and verification resources
For authoritative and updated legislation, consult the Income Tax Department, its e-Filing portal, and the Government of India's India Code legislative database. Search for the Income-tax Act, 1961, section 35DDA, and the Income-tax Act, 2025, as appropriate to the relevant tax year.
Read the site's Income Tax Act, 1961 guide for related deductions and definitions.
Frequently asked questions
Can an employer deduct the full VRS payment immediately?
Under section 35DDA of the 1961 Act, qualifying expenditure is spread over five previous years in equal one-fifth instalments, rather than deducted in full in the payment year.
Does section 35DDA apply to all employees?
The rule concerns expenditure paid to an employee in connection with voluntary retirement under a voluntary retirement scheme. The facts and applicable statutory period must be checked.
What happens to unclaimed instalments after amalgamation?
Where the statutory conditions are satisfied, the amalgamated Indian company continues the remaining deductions; the transferor is barred from taking the deduction in the transfer year.
Is an employee's VRS exemption the same as the employer's deduction?
No. Section 35DDA governs the employer's business deduction. The employee's possible exemption under section 10(10C) and other tax treatment are separate matters.
Editorial note: This article provides general legal information, not a determination of eligibility for a particular employer or transaction. Verify applicable amendments, notifications and transition rules before filing a return.