Mahanagar Telephone Nigam Ltd, which operates in Delhi and Mumbai, has sought the department of telecommunications' approval for a voluntary retirement scheme.
The scheme will be offered to 15,000 employees, or one-third of the workforce, in the current financial year.
The proposal has been cleared by the MTNL board.
The company will have to make a one-time payment of Rs 2,000-3,000 crore (Rs 20-30 billion) to employees opting for the scheme.
MTNL has sought financial support from DoT.
"The VRS will help us reduce the wage bill and keep costs under control. We have surplus workforce.
"According to our estimate, we should not have more than 20,000 employees," said a senior MTNL official.
MTNL has 45,000 employees.
Its wage bill was Rs 1,704 crore (Rs 17.04 billion) in the financial year ended March 2011, as against Rs 1,968 crore (Rs 19.68 billion) in financial year ended March 2010.
The pension bill was Rs 340 crore (Rs 3.4 billion) in 2010-11 as against Rs 261 crore (Rs 2.61 billion) in 2009-10.
In 1998-99, the company had 61,967 employees.
The number fell to 44,910 in 2009-10.
MTNL has launched VRS three times in the past for all employees but without much success.
This time, it plans to offer the scheme only to some employees based on the business segments they operate in.
"The employees in redundant segments will be reduced first," said the official.
Sam Pitroda, the prime minister's adviser on infrastructure, had expressed the need to reduce workforce in both state-owned telecom companies -- MTNL and Bharat Sanchar Nigam Ltd.
Pitroda said the government should start with BSNL. He proposed a reduction in BSNL's workforce by 100,000 to 300,000.
The DoT secretary, in a recent interview with Business Standard, said the need to reduce the number of employees in MTNL and BSNL was generally accepted.
But it should be a targeted reduction and in segments in which surplus had been identified, he said.
However, such moves have always met with strong opposition from employee unions.
MTNL and BSNL have been hit by competition and falling rates.
For the first time since its inception in 2000, BSNL posted a loss, of Rs 1,823 crore (Rs 18.23 billion), in 2009-10.
It is expected to post a loss of about Rs 2,500 crore (Rs 25 billion) for 2010-11.
MTNL's loss was Rs 1,099 crore (Rs 10.99 billion) in the fourth quarter ended March 31.