PayPal, Oracle, Volkswagen layoffs: Is severance pay taxable in India?
What's the story
In the wake of recent layoffs by global giants like PayPal, Oracle, and Volkswagen, the issue of severance packages has come to the fore. The trend is not new as AI-driven job cuts have been dominating headlines for years. PayPal recently cut around 220 jobs in India as part of its multi-year turnaround plan. Meanwhile, Oracle is said to be planning another round of layoffs that could affect up to 3,000 employees in India.
Tax liability
Severance pay and taxation
Most companies offer severance pay to employees who have been laid off.
While this exit compensation can provide financial cushion after job loss, it may also be subject to tax.
Rahul Charkha, Partner at Economic Laws Practice, said any compensation given by an employer or former employer at termination or modification of employment is treated as "profits in lieu of salary."
In such cases, the exit compensation is taxable under the head "Salaries," usually at the employee's applicable slab rate.
Exemptions
When is severance pay exempt from tax?
Charkha explained that retrenchment compensation paid to an eligible "workman" under the applicable labor-law framework may be exempt under Section 10(10B).
This means not all payments termed as "severance" are treated equally by Indian tax law.
Another exemption applies to employees who get compensation as a voluntary retirement or separation package (VRS) under Section 10(10C) of the Income-tax Act.
ITR filing
How to report severance pay in ITR
Experts recommend reporting severance pay in the income tax return (ITR) for the assessment year it was received.
Nishant Shanker, a tax and investment expert at Navraj Global Advisors, said employees should first get their full & final settlement statement and Form 16 to see how their employer has classified the severance payment.
The taxable portion should generally be included under "Income from Salary" in the ITR, while any eligible exemption should be claimed separately.
FNF taxation
Analyzing full & final settlement (FNF) payment
Shanker stressed the need to analyze each component of a full and final settlement (FNF) payment separately as they may attract different tax treatment under income tax law.
He said salary arrears are usually taxable as salary and may qualify for relief, if applicable.
Gratuity can be exempted subject to conditions and a limit of ₹5 lakh.
Severance or termination compensation also needs separate testing, including applicability of Section 10(10B).