Ex-BSNL Employees Absorbed from DoT Treated as Central Govt. Retirees for Income Tax Exemption on Leave Encashment: Kerala HC [Read Order]

The Kerala HighCourt has held that employees of Bharat Sanchar Nigam Limited (BSNL) who were originally employed with the Department of Telecommunications (DoT), but later absorbed into BSNL must be treated as having retired from Central Government service for the purposes of claiming income tax exemption on ‘leave encashment’ as under Section 10(10AA)(i) of the Income Tax Act, 1961.

A writ petition was filed by Sanchar Nigam Pensioners' Welfare Association along with two other retired officials who were initially employed with the DoT.

The petitioners were initially employed with DoT but after the formation of BSNL, they exercised their option to continue with BSNL as per Rule 37A of the Central Civil Services (Pension) Rules, 1972 (CCS Rules). Subsequently, they availed the Voluntary Retirement Scheme (VRS) introduced by BSNL in 2019.

While computing retirement benefits, BSNL deducted tax at source on the leave encashment amounts by relying on an internal Corporate Office letter dated 04.05.2012.

By means of the corporate letter, the petitioners were deemed to not be eligible for the benefits under Section 10(10AA)(i) of the Act. Challenging the deduction, the petitioners contended that they were entitled to full exemption under Section 10(10AA)(i), which applies to employees of the Central Government.

Senior Counsel O.V. Radhakrishnan appearing for the petitioners, contended that the corporate office letter was issued disregarding statutory provisions and that BSNL lacked authority to issue such an executive instruction.

\Mathews K. Philip for BSNL stated that the affected petitioners had retired from BSNL and not the central government and were not eligible for the exemptions.

Jose Joseph appeared for the Income Tax Department.

Justice Harisankar V. Menon examined the provisions of Section 10(10AA) of the Act alongside Rule 37A of the CCS Rules, which governs the conditions for payment of pension on absorption of Government servants into Public Sector Undertakings.

The Court noted that DoT had been converted into BSNL, and that Rule 37A provides that upon such absorption, the employees are deemed to have retired from Government service and that their pensionary benefits are to be calculated in the same manner as those of Central Government servants.

The Bench referred to the decision in State of Kerala v. Falcon Infrastructure Limited (2025) to note that statutory provisions must be read harmoniously.

Accordingly the Court affirmed that the petitioners’ retirement must be taken as a case of retirement from Central Government service and quashed the corporate office letter, while entitling the petitioners to the benefit under Section 10(10AA)(i) to claim the exemption in their respective income tax returns.

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