Severance Package: All You Must Know

Understanding severance pay isn't just for those who are losing their jobs, explains Ramalingam Kalirajan.

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You've just been called into a meeting.

The HR person takes a deep breath and says, 'We're restructuring... but don't worry, there's a severance package.'

Now pause for a moment -- what exactly does that mean?

Is it a golden handshake that rewards your years of service, or just a softer way of saying goodbye?

Will you actually receive the full amount that's being promised -- or will taxes and fine print quietly eat into it?

In today's unpredictable job market -- where layoffs, automation, and restructuring have become common even in stable companies --understanding severance pay isn't just for those who are losing their jobs.

It's essential knowledge for every working professional in India who wants to protect their financial future.

What Is Severance Pay?

Imagine this: You've spent years building your career, giving your best to a company -- and one day, your role is suddenly declared redundant.

That's where severance pay steps in.

Severance pay is a financial safety net provided by your employer to help you manage the uncertain period between jobs.

It's meant to give you breathing space -- to pay your bills, manage your commitments, and plan your next move without panic.

But don't confuse it with a bonus or a goodwill gesture.

It's not a gift.

It's a right -- something owed to you either under your employment contract, company policy, or labour law -- designed to soften the financial blow of an unexpected job loss.

When is Severance Pay Applicable?

You might wonder: 'Will I qualify if I'm asked to resign? What if my company shuts down?'

Severance pay is typically applicable when:

The company restructures or shuts down operations
Your role becomes redundant due to automation or cost-cutting
You're asked to leave on mutual terms

However, if you voluntarily resign, severance doesn't usually apply -- unless your employment agreement says otherwise.

So before signing that letter, always ask: Am I eligible for severance?

How is Severance Pay Calculated in India?

Here's the big question everyone asks: 'How much will I get?'

Your severance amount depends on three main factors:

Your years of continuous service
Average pay drawn, and
Your company's internal policy

As per the Industrial Disputes Act, eligible employees receive 15 days' average pay for every completed year of service (or part exceeding six months).

But what's the reality?

Many companies go beyond this -- offering a month's salary for each year of service or a lump-sum package based on tenure and seniority.

Severance Pay Rules for Workmen and Non-Workmen

For Workmen (Industrial Disputes Act, 1947)

If your role involves technical, clerical, or operational work (earning below Rs 10,000/month in supervisory roles), you're covered by law.

You're entitled to:

15 days' average pay per year of service,
Notice pay, and
Other statutory dues like gratuity and leave encashment.

For Non-Workmen

If you're in a managerial or executive role, your severance depends on your employment contract -- not law.
Some companies offer 30 days' pay per year of service, while others set caps based on years left to retirement.

The takeaway? Always read your contract carefully -- that fine print could decide your financial future.

Severance Pay Taxation: How Much Do You Really Get?

Think that Rs 20 lakh severance pay-out will land straight into your account?

Not quite.

Under Section 17(3) of the Income Tax Act, 1961, severance pay is treated as 'profits in lieu of salary.'

Translation? It's taxed like your regular income.

That means your severance is added to your total annual income and taxed based on your slab rate.

Unless you qualify for specific exemptions -- your in-hand pay out may shrink significantly after tax.

So before celebrating that big cheque, calculate your post-tax amount -- it might save you from future surprises.

Real-World Examples (external links) of Severance Packages in India

Companies across India have taken different approaches to severance. For instance:

Tata Consultancy Services (2025): Offered tiered severance packages for long-tenured employees.

Amazon India (2023): Provided five months' pay and career transition support during layoffs.

Ford India (2022): Offered between Rs 33 lakhs to Rs 85 lakhs per employee after plant closure.

Accenture India (2020): Gave seven months' pay, including notice and voluntary exit benefits.

Clearly, severance isn't a one-size-fits-all deal -- it depends on company policy, industry trends, and negotiation.

Final Thoughts: Plan Smart Before You Sign Off

Losing a job can shake your confidence -- but your severance pay can also be your launchpad to financial stability, if handled wisely.

Should you clear loans? Invest it? Or keep it for emergencies?

This is where professional guidance matters.

A Certified Financial Planner (CFP) can help you structure your pay-out strategically -- so that it supports your long-term goals, not just short-term relief.

Because in the end, severance isn't just the end of employment -- it's the start of a new financial chapter.

You can ask rediffGURU Ramalingam Kalirajan your questions HERE.

Ramalingam K, an MBA in Finance, is a Certified Financial Planner. He is the Director and Chief Financial Planner at holisticinvestment, a leading financial planning and wealth management company.

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Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.