Severance Calculator

What's taxable and what's exempt in a severance package

A severance or exit package typically bundles together several components that are taxed very differently, and getting them confused is one of the most common — and most expensive — mistakes people make when negotiating or just trying to understand what they'll actually take home. None of it is a single lump sum with one tax rate; each piece has its own rule.

Notice pay — whether you're bought out of your remaining notice period or paid in lieu of notice — is fully taxable as salary income. There's no special exemption for it, even though it can feel like a one-time payment rather than regular pay.

Gratuity is the component most people get wrong, in two different directions. First, it only applies if you've completed five or more years of continuous service — a very common and emotionally difficult point of confusion for people laid off just under that threshold, since no statutory gratuity is owed at all below five years, regardless of how large the rest of the package is. Second, for those who are eligible, gratuity up to ₹20,00,000 is exempt from tax — calculated using the standard 15/26 formula (last drawn Basic × 15/26 × years of service) — with any amount above that cap taxed as regular income.

Leave encashment is the other frequently misunderstood piece. Many people assume it's tax-free like gratuity, but the ₹25,00,000 exemption for leave encashment applies specifically at retirement or death — not to a mid-career layoff or resignation. If you're leaving your job any other way, your leave encashment is essentially fully taxable as salary income, the same as notice pay.

A fourth component, retrenchment compensation, is a separate legal entitlement from gratuity under the Industrial Relations Code — 15 days' pay for every completed year of service. It's easy to conflate with gratuity since both scale with years of service, but they're distinct, and retrenchment compensation only applies if you're legally classified as a "workman" — broadly, a non-managerial, non-supervisory role. Most salaried tech and corporate employees aren't covered by it, which is why it's an optional toggle here rather than something applied automatically from your years of service.

Given ongoing layoff cycles across the tech industry, it's worth running your actual numbers rather than assuming your full severance figure is what you'll receive — the gap between the headline number in your exit letter and what actually lands in your account can be substantial once TDS is applied.