Finance Minister Jaswant Singh's Budget announcement to exempt voluntary retirement scheme based on deferred payment up to Rs 5 lakh (Rs 500,000) from the tax net is aimed at making voluntary retirement schemes more attractive, and help public sector divestment in the long run.

Companies offering voluntary retirement schemes can now spread their pay-out over a few years in instalments of Rs 5 lakh and less, so that employees can benefit from the tax exemption.

Until now, the tax exemption was applicable up to Rs 5 lakh on a lumpsum basis. The balance amount attracted tax deducted at source at around 30 per cent.

Steel Authority of India Ltd, which is shedding excess staff through the voluntary retirement scheme route has tried out deferred payment in the past. But it has not been attractive owing to high incidence of taxes.

"With this move, we hope that more people will opt for voluntary retirement scheme. Earlier, we were paying the entire amount at one shot to our employees opting for this scheme, of which a maximum of Rs 5 lakh was exempt from the tax net. Now we may look at introducing this scheme based on deferred payment," a senior official of SAIL said.

He added that the move might not bring in a drastic change. Government officials said the move will give more options to companies.

"Companies like SAIL, which were offering voluntary retirement schemes on a lumpsum basis will now have the option of introducing a deferred payment mode. Therefore, the move is beneficial for companies. At the same time, companies that have not initiated any voluntary retirement scheme as yet, may introduce such schemes in the near future," the official said.