Laid off? Severance pay in India: Complete guide to rules, eligibility & tax

Severance pay is a financial compensation given by an employer to an employee when the employee is laid off, terminated, or asked to resign.

Severance pay is taxable, so it’s important for employees to carefully review their agreements and understand the tax implications before accepting it.

In most cases, severance is treated as “profits instead of salary” under Section 17(3) of the Income Tax Act, 1961. This includes any compensation received from an employer at the time of termination or due to changes in employment terms.

Simply put, severance pay is taxed like regular salary, and it will be added to your income and taxed according to your applicable income tax slab.

According to media reports, several companies in India have extended significant severance packages to employees affected by layoffs or organisational restructuring:

Tata Consultancy Services (TCS), India’s largest IT services firm, is offering tiered severance packages to long-serving employees,  according to a report by Moneycontrol.

In January 2023, Amazon India began layoffs and, according to a report by India TV News, offered a minimum of five months’ pay as severance to affected employees. The package also reportedly included career transition assistance.

In January 2022, Ford India, upon announcing the closure of its Chennai manufacturing plant, offered a generous severance payout. As reported by The Times of India (TOI), the average package was around ₹41 lakh per employee, with a minimum of ₹33 lakh and a maximum of ₹85 lakh.

In 2020, Accenture India provided a severance payout of seven months’ salary to impacted employees, according to TOI. This included three months' pay instead of notice and an additional four months for those opting for voluntary resignation.

Severance pay in India

Severance pay in India is governed by both law and company policy.

"Employees who qualify as “workmen” are entitled to 15 days’ average pay per year of service under the Industrial Disputes Act, 1947 (ID Act). Workmen category employees are essentially those who are involved in technical, operational, unskilled, skilled, clerical and manual work. It excludes those in supervisory and managerial functions drawing a monthly salary in excess of INR 10,000. Severance or retrenchment compensation under the ID Act is calculated at 15 days’ average pay for each completed year of continuous service or part thereof, an excess of 6 months," said Pooja Ramchandani, Partner, Shardul Amarchand Mangaldas & Co.

On the other hand, severance for non-workmen employees is governed by their contractual terms. Severance policies of organisations usually prescribe a higher level of compensation than what is prescribed under the ID Act. Market practice indicates that some organisations prescribe a formula of 30 days per year; others have a cap on the severance payout, and some prescribe a maximum and minimum threshold calculated on the number of years remaining to retirement, added Pooja.

Severance or retrenchment payments are in addition to notice and other statutory dues.