A number of multinational firms corresponding to PayPal, Oracle and Volkswagen are reportedly shedding employees in India, placing severance packages in focus. This is not a brand new pattern, as layoffs, largely pushed by the speedy adoption of AI, have been making headlines over the previous few years.
PayPal has diminished roughly 220 jobs in India as a part of the funds agency’s multi-year turnaround plan laid out earlier this yr, Reuters reported on Thursday, citing folks conscious of the matter.
Oracle, alternatively, is reportedly planning a contemporary spherical of job cuts that would affect as much as 3,000 staff in India, Moneycontrol reported earlier this week. Volkswagen Group’s India enterprise additionally plans to chop round 12% of its workforce within the nation, in response to a Bloomberg report.
In most firms, the impacted staff obtain severance pay. Whereas this exit compensation can present a monetary cushion after job loss, staff may must pay tax on the quantity obtained. So, how is severance pay taxed in India, and when can staff declare tax exemptions?
Ought to each worker pay tax on severance pay?
Sure, any compensation obtained by an worker from an employer or a former employer at or in reference to termination of employment or a modification of employment phrases is handled as “income in lieu of wage,” stated Rahul Charkha, Companion at Financial Legal guidelines Follow.
In such circumstances, the exit compensation is taxable underneath the pinnacle “Salaries”, ordinarily on the worker’s relevant slab charge, he added.
Nevertheless there are some exceptions. Charkha defined that any retrenchment compensation paid to an eligible “workman” underneath the relevant labour-law framework could qualify for exemption underneath Part 10(10B). This primarily signifies that the Indian tax regulation doesn’t deal with each fee described as “severance” in the identical method.
One other exception applies to staff who obtain compensation as a voluntary retirement or voluntary separation package deal (VRS) underneath Part 10(10C) of the Revenue-tax Act. “Any quantity obtained on voluntary retirement or termination could qualify for a separate exemption of as much as ₹5 lakh. The stability quantity is taxable,” Charkha famous.
In the meantime, every other compensation related with the termination or modification of employment which doesn’t particularly fall underneath the pinnacle Salaries is taxed underneath the residuary head “Revenue from different sources”.
“Part 56(2)(xi) is sufficiently broad to cowl funds from any individual and isn’t restricted to employer or former employer, for instance, compensation from a potential employer the place the employment by no means commenced or from an unrelated third get together,” the tax professional stated.
The right way to report severance pay whereas submitting their ITR?
Now that we all know severance pay have to be given for tax most often, specialists clarify the way it ought to be reported within the revenue tax return (ITR) submitting for the evaluation yr wherein you obtained the compensation.
“The worker ought to first acquire the total & closing settlement assertion and Kind 16 and establish how the employer has categorised the severance fee,” in response to Nishant Shanker, tax & funding professional at Navraj International Advisors.
The taxable portion ought to typically be included underneath “Revenue from Wage” within the ITR, whereas any eligible exemption ought to be individually claimed. Shanker additionally reiterated that the figures ought to be reconciled with Form 26AS, AIS and the TDS mirrored towards the worker’s PAN.
In the meantime Charkha added that the worker ought to protect the employment settlement, termination or retrenchment letter, separation scheme, detailed settlement assertion, proof of years of service, wage workings, exemption computation, Kind 10E and proof of tax deducted.
“If Part 89 reduction (Part 157 of the Revenue-tax Act, 2025) is on the market, Kind 10E (new Kind 39) have to be filed electronically with the prescribed historic revenue and tax computations earlier than the corresponding reduction is claimed within the return,” Charkha stated. Part 89 of the Revenue-tax Act provides tax reduction if you obtain wage or household pension in arrears or prematurely.
How is FNF fee taxed in India?
Every part of a full and closing settlement (FNF) fee ought to be individually examined as a result of they will have completely different tax remedy as per revenue tax regulation, in response to Shanker.
He famous that wage arrears are typically taxable as wage and should qualify for reduction, the place relevant. Gratuity, alternatively, can qualify for exemption topic to the circumstances and restrict of ₹5 lakh.
Severance or termination compensation additionally must be examined individually, together with whether or not Part 10(10B) is relevant, like we mentioned above.
“Therefore, the label ‘full and closing settlement’ doesn’t decide taxability, the underlying elements do,” the tax professional stated.
