While conducting business operations in any country, every employer ought to adhere to certain labor compliance requirements applicable there. In India, labor law is a concurrent subject in the Constitution of India. Therefore, both the Central and State Governments govern the employment regulations in India. Severance pay in India is one of the labor compliance requirements that every businesses need to fulfill. It is a kind of compensation program that revolves around gratuity. It is provided to employees upon their termination, resignation or retirement.
Unfortunately, misconceptions loom large about severance pay in India. For instance, not many have clear answer to questions such as- “Is severance pay taxable in India?” or “Is severance pay mandatory in India?”
This blog will guide you through the various severance pay laws in India so that you can stay compliant and keep your business shielded from legal and reputational risks. Let’s now delve deep into the details!
What is the meaning of Severance Pay?
Severance pay is governed by the Industrial Disputes Act, 1947 (IDA), which addresses retrenchment, layoffs and certain forms of employee termination. Specifically, under Section 25F, employers are obligated to provide severance compensation to employees with at least one (1) year of continuous service. This compensation is calculated at 15 days of average pay for every completed year of service.
Severance pay refers to the compensation or benefits provided to an employee who is either terminated or laid off.
It is a form of financial assistance provided to employees as they transition out of the company. Severance pay is typically offered to employees who are terminated due to reasons beyond their control, such as layoffs, retrenchment, restructuring, or downsizing.
The purpose of severance pay is to provide employees with a financial cushion during the period of unemployment and to recognize their service and contributions to the organization.
The specific terms and conditions of severance pay vary depending on factors such as the employee’s length of service, employment contract, company policy, and local labor laws.
Severance pay serves as a positive gesture and token of goodwill on the part of the employer to aid an employee in navigating the unexpected transitory stage between working and unemployment.
Example of Severance Pay in India
Let’s understand what is severance pay in India with an example.
Say, an employee X has been working at a manufacturing company for 8 years. Due to economic downturn, the company decides to downsize and lays off several employees, including X.
Supposing that the last drawn salary of X was Rs 40,000 per month and has completed 8 years of continuous service with the company, he is eligible to receive a certain sum upon his termination due to the company’s downsizing. This amount serves as severance pay to acknowledge his years of service with the company.
When does an Employee become eligible to receive Severance Pay in India?
Under the following circumstances, an employee becomes entitled to receive severance pay in India:
- Layoff of an employee by the employer for 35 consecutive weeks or beyond
- Layoff of all the employees owing to permanent cessation of the business
- Initiation of constructive dismissal of an employee by an employer upon which the former resigns within a stipulated time frame
- Termination of an employee owing to the company going bankrupt
Important considerations for calculating Severance Pay in India
Severance package offered to employees in India can vary from one organisation to another. While determining the compensation amount to be extended to employees, an employer needs to consider the following factors:
- The employee’s salary during the tenure of employment
- Employment duration
- Designation/Position of the employee at the company
- Performance of the employee during the term of employment
- Other relevant factors, if applicable
How is Severance Pay calculated in India?
Looking for a severance pay calculator? Well, severance pay in India can be easily calculated by using the following formula:
Severance Pay=
(15/365)× Average Pay × (Completed Years of Service+(Part of Year in Excess of 6 Months/365))
What are the benefits of Severance Pay in India?
Severance pay in India offers a wide range of benefits to both employers and employees. These include:
Benefits of Severance Pay for Employees
- Monetary Support
- Legal Entitlement
- Employee Satisfaction and Retention
- Tax-efficient Form of Compensation
Severance pay holds immense importance in the world of employment, serving as a vital safety net during times of transition.
By understanding the meaning of severance pay and its underlying significance, both employees and employers can navigate terminations with greater clarity and fairness.
Now that you have gained a clear understanding about what severance pay in India entails, it is time to strategize things and ensure if you are adhering to the relevant sets of legislation. No one wants to get trapped in legal battles for violating legal provisions and get heaped with financial penalties.
