Laid Off By An MNC? Here’s How Your Severance Package Will Be Taxed

Layoffs at large multinational companies have again placed severance packages under scrutiny. Oracle and Volkswagen have announced job cuts affecting employees in India, while Apple, Uber and PayPal are among the other major companies trimming their workforce.

According to Layoffs.fyi, 129,488 technology employees across 296 companies have been laid off in 2026. Apple reportedly laid off more than 200 employees working across Siri, Vision Pro, and related software teams last month.

For affected employees, the amount credited at exit may include severance pay, gratuity, leave encashment, notice pay, and other dues. Each component must be examined separately while calculating tax.

Severance Pay Is Usually Taxed As Salary

“Severance pay is generally treated as profits in lieu of salary under Section 17(3) of the Income Tax Act and taxed as regular salary income in the year it is received,” says Shourya Garg, founder, Garg & Garg Tax Associates.

The payment is added to the employee’s taxable income for the relevant financial year and taxed at the applicable slab rate. Calling the payment ex gratia, special allowance or severance does not, by itself, change its tax treatment.

“There’s no concessional rate for it, and since the whole amount usually lands in one financial year, it can push someone into a much higher bracket than their regular salary ever would,” says Dinesh K. Jain, managing partner and chartered accountant, Dinesh Aarjav & Associates.

A company-initiated layoff does not automatically qualify for the exemption available under Section 10(10C). That benefit applies when the exit is covered by a voluntary retirement or separation scheme satisfying the conditions prescribed under Rule 2BA.

“However, in cases of company-initiated layoffs or retrenchment that do not fit this specific framework, the entire severance amount is usually taxed as salary income without that exemption, though relief under Section 89 may still be available in such situations,” says Garg.

The exemption under Section 10(10C) is limited to Rs 5 lakh. Retrenchment compensation may separately qualify for relief under Section 10(10B), but this generally applies to eligible workmen covered by the relevant labour law provisions.

Check Whether Section 89 Relief Applies

A large one-time payout may increase the employee’s tax liability because income gets concentrated in one year. Section 89 relief can reduce this burden in eligible cases involving compensation connected with earlier years.

“Even without an outright exemption, Section 89 lets a lump sum tied to past years be re-taxed as if spread across those years, lowering the effective burden,” says Dinesh K. Jain.

Employees must calculate the relief and submit Form 10E before claiming it in their income tax return. They should also obtain a detailed breakup of the settlement, since gratuity and leave encashment have separate exemption rules.

FAQs

1. Is severance pay taxable in India?
Yes. It is generally treated as profits in lieu of salary and taxed at the employee’s applicable income-tax slab rate in the year of receipt.

2. Can employees claim exemption on severance pay?
An exemption of up to Rs 5 lakh may be available under Section 10(10C) if the separation scheme fulfils the conditions prescribed under Rule 2BA.

3. How can employees claim relief under Section 89?
Eligible employees must calculate the relief and submit Form 10E before claiming it in their income tax return.