Income tax on severance pay: Pushing some of the biggest economies into a lockdown to curb the spread of the pandemic, layoffs are inevitable in the current work scenario. If one does end up losing their job, the company is liable to let them go with a severance package – taxable in nature. Amid mass layoff news coming in from the office of recruiters like Twitter, Amazon, Meta, Google, etc., it is important to know that the severance pay that a laid-off employee receives is not a tax-free income. However, there are certain conditions under Section 10(10C) that enables a laid-off employee to claim income tax exemption on severance payment. But, the income tax exemption can only be claimed in the assessment year the compensation is received.
Speaking on income tax rules in regard to severance pay, Aarti Raote, Partner at Deloitte India said, “As a general rule, severance pay would be liable to tax in the hands of the employee. However, the tax provisions give exemptions from taxation to employees up to certain limits for payments received under the Provisions of the Industrial Disputes Act as retrenchment compensation or VRS payments that qualify for section 10(10C). For this the employee needs to have these schemes framed as per the guidelines mentioned in those sections and meetings conditions mentioned therein.”