PayPal, Oracle, Volkswagen layoffs: How are severance packages taxed in India?

Several multinational companies such as PayPal, Oracle and Volkswagen are reportedly laying off staff in India, putting severance packages in focus. This isn't a new trend, as layoffs, largely driven by the rapid adoption of AI, have been making headlines over the past few years.

PayPal has reduced roughly 220 jobs in India as part of the payments firm's multi-year turnaround plan laid out earlier this year, Reuters reported on Thursday, citing people aware of the matter.

Oracle, on the other hand, is reportedly planning a fresh round of job cuts that could impact up to 3,000 employees in India, Moneycontrol reported earlier this week. Volkswagen Group's India business also plans to cut around 12% of its workforce in the country, according to a Bloomberg report.

In most companies, the impacted employees receive severance pay. While this exit compensation can provide a financial cushion after job loss, employees may also have to pay tax on the amount received. So, how is severance pay taxed in India, and when can employees claim tax exemptions?

Should every employee pay tax on severance pay?

Yes, any compensation received by an employee from an employer or a former employer at or in connection with termination of employment or a modification of employment terms is treated as “profits in lieu of salary," said Rahul Charkha, Partner at Economic Laws Practice.

In such cases, the exit compensation is taxable under the head “Salaries”, ordinarily at the employee’s applicable slab rate, he added.

However there are some exceptions. Charkha explained that any retrenchment compensation paid to an eligible “workman” under the applicable labour-law framework may qualify for exemption under Section 10(10B). This essentially indicates that the Indian tax law does not treat every payment described as “severance” in the same manner.

Another exception applies to employees who receive compensation as a voluntary retirement or voluntary separation package (VRS) under Section 10(10C) of the Income-tax Act. “Any amount received on voluntary retirement or termination may qualify for a separate exemption of up to ₹5 lakh. The balance amount is taxable,” Charkha noted.

Meanwhile, any other compensation connected with the termination or modification of employment which does not specifically fall under the head Salaries is taxed under the residuary head “Income from other sources”.

“Section 56(2)(xi) is sufficiently broad to cover payments from any person and is not restricted to employer or former employer, for example, compensation from a prospective employer where the employment never commenced or from an unrelated third party,” the tax expert said.

How to report severance pay while filing their ITR?

Now that we know severance pay must be given for tax in most cases, experts explain how it should be reported in the income tax return (ITR) filing for the assessment year in which you received the compensation.

“The employee should first obtain the full & final settlement statement and Form 16 and identify how the employer has classified the severance payment,” according to Nishant Shanker, tax & investment expert at Navraj Global Advisors.

The taxable portion should generally be included under “Income from Salary” in the ITR, while any eligible exemption should be separately claimed. Shanker also reiterated that the figures should be reconciled with Form 26AS, AIS and the TDS reflected against the employee's PAN.

Meanwhile Charkha added that the employee should preserve the employment agreement, termination or retrenchment letter, separation scheme, detailed settlement statement, proof of years of service, salary workings, exemption computation, Form 10E and evidence of tax deducted.

“If Section 89 relief (Section 157 of the Income-tax Act, 2025) is available, Form 10E (new Form 39) must be filed electronically with the prescribed historical income and tax computations before the corresponding relief is claimed in the return,” Charkha said. Section 89 of the Income-tax Act offers tax relief when you receive salary or family pension in arrears or in advance.

How is FNF payment taxed in India?

Each and every component of a full and final settlement (FNF) payment should be separately examined because they can have different tax treatment as per income tax law, according to Shanker.

He noted that salary arrears are generally taxable as salary and may qualify for relief, where applicable. Gratuity, on the other hand, can qualify for exemption subject to the conditions and limit of ₹5 lakh.

Severance or termination compensation also needs to be tested separately, including whether Section 10(10B) is applicable, like we discussed above.

“Hence, the label 'full and final settlement' does not determine taxability, the underlying components do,” the tax expert said.