India’s IT Layoff Wave Revives Debate Over Taxing Severance Pay

The debate on layoffs in India’s tech sector is evolving from efficiency and cost-cutting to more fundamental concerns about workers' post-job futures.

For many employees, severance pay is the only financial buffer between employment and uncertainty. Yet, this payout is treated as taxable income under the current Income Tax Act. 

As layoffs become more frequent, driven by automation, restructuring, and macroeconomic pressures, the issue is moving beyond HR policy into a broader public debate on fairness.

Recent job cuts across global and Indian firms, including Oracle, have reignited scrutiny of how severance is taxed. It has led to growing calls from political leaders, labour groups, and industry professionals to reconsider whether severance should be taxed at all.

Kalvakuntla Kavitha, Leader, Telangana Jagruti, questions the asymmetry between how companies and employees experience financial pressure. 

Speaking to PTI, she says companies invoke practicality when cutting costs through layoffs, but employees do not receive similar consideration.

She points to what she describes as a cumulative disadvantage for workers: limited salary growth, variable, uncertain pay, and sudden job loss. “When it comes to layoffs, suddenly cost-cutting becomes the priority. But employees do not see fairness during their tenure,” she says.

Kavitha calls for a tax waiver on severance payouts, particularly amid AI-led disruption. “If a company gives ₹10 lakh as severance, about 31% goes in taxes. If that is waived, it will help employees cope better,” she says, adding that she plans to raise the issue with Finance Minister Nirmala Sitharaman. 

She warns that AI-driven disruption could persist for the next two to three years and calls for a “forward-looking policy”.

Under current rules, exemptions remain limited. Section 10(10B) provides partial relief for retrenchment compensation, but caps and conditions restrict its applicability. Employees can seek marginal relief under Section 89 for lump-sum payments, but the broader framework continues to treat severance as income, even when it effectively compensates for job loss.

Industry Demands a Policy Review 

Labour representatives argue that this classification is fundamentally flawed.

“Severance is not regular income. It is support given to a person who has lost their job,” says Harpreet Singh Saluja, President, Nascent Information Technology Employees Senate (NITES). “This money helps them manage basic expenses until they find new work. Taxing it reduces that support at a very difficult time.”

Saluja adds that layoffs are often beyond an employee’s control, which makes taxation particularly burdensome. “Instead of giving relief, taxing severance puts more financial pressure on workers and their families,” he says. He calls for severance to be treated as compensation for loss of livelihood, with full or higher exemptions in cases of forced termination.

Alagunambi Welkin, General Secretary, Union of IT and ITES Employees (UNITE), highlights the lack of bargaining power employees face during layoffs.

“When layoffs happen, it comes as a shock. People tend to accept whatever is offered, and there’s little room for negotiation,” Welkin told AIM. “If they push back, they are often told they may not even get that amount.”

He adds that taxation is often a secondary concern because severance itself is typically inadequate. “Legally, companies are required to pay at least 15 days’ basic salary for every year of service. But many offer about one month’s pay. Employees know it is already insufficient to cover even six months of expenses,” he says.

Welkin calls for stronger safeguards, including policies that mandate higher support during layoffs. “Even if layoffs cannot be stopped, there should be mechanisms to support basic needs,” he says.

Industry voices are also beginning to question the rationale behind taxing severance. Vishal Mandhare, a Solution Consulting Professional, says there is a clear disconnect between policy intent and economic reality.

“Taxing severance pay is not just bad economics; it reflects a lack of empathy,” he says.

As AI accelerates job disruption, debates on severance tax shift from technicalities to fairness, prompting policymakers to rethink how job loss is addressed.