Pink slip, then tax slip: Why your severance shrinks faster than you think
A job loss is supposed to come with a cushion, a brief window to recover, regroup, and then restart. However, in India, that cushion often comes with a deduction (sometimes a massive one). Just when income stops, the only financial buffer you receive is treated like taxable earnings, quietly reducing the time you thought you had
For many employees facing layoffs today, the first instinct is not relief, but calculation. How long will their severance last? Rent, school fees, EMIs, groceries... The math begins almost immediately. In India, that math has a hidden variable, called tax.
Here, severance pay, the amount meant to help you stay afloat after losing a job, is treated as income under the Income Tax Act. It is added to your total earnings for the year and taxed according to your slab. “It's classified as 'profits in lieu of salary' under Section 17. From a tax standpoint, there is no real distinction between severance and regular salary,” Tarundeep Sehgal, Partner Tax at AKM Global, confirms this for India Today.
That classification may make sense on paper, but in reality, it creates a gap between what severance is meant to do and what it actually delivers.
The gap is already playing out in real layoffs.
Following the recent job cuts at Oracle Corporation, a Bengaluru-based employee who was let go told India Today that his severance package initially felt reassuring. “On paper, it looked like I had a few months to breathe. But once I factored in tax, the amount that actually hit my account was far lower than I expected,” he says.
A developer by profession, this employee had given three years of his professional journey to Oracle before the pink slip arrived at 6 am with his severance calculations laid out simply.
WHY IS SEVERANCE TAXED LIKE SALARY?
By definition, severance is designed as a buffer. A temporary cushion that gives employees time to find their next job without immediate financial stress. But when taxed like income, that cushion quickly shrinks.
Consider a common scenario where an employee receives three months of salary as severance. If they fall into the 30% tax bracket, a significant portion is deducted upfront. What was meant to sustain them for a quarter may now last closer to two months.
There are limited relief provisions. Section 89 of the Income Tax Act allows employees to spread the tax burden on lump sum payments across previous years, reducing the spike in liability, but this is a technical adjustment, not a structural fix.
“Relief provisions help with timing, not with the tax itself. The income remains taxable. It just reduces the immediate burden slightly,” says Sehgal. And that is where the disconnect lies, because severance is not a bonus, neither is it a reward. It is, in most cases, compensation for job loss.
Yet, it is taxed as if nothing has changed.
WHAT HAPPENS ELSEWHERE?
India is not alone in taxing severance. But it stands out for what it does not provide alongside it. In the United States, for example, severance pay is taxed, but employees can access unemployment benefits that provide temporary income support. Healthcare coverage is also often extended for a limited period, easing one of the biggest financial pressures after a job loss.
In the United Kingdom, redundancy payments up to a certain threshold are tax-free, offering immediate relief when it is needed most. Countries such as Australia and Singapore also provide partial tax exemptions on genuine redundancy payouts, recognising that this is not regular income.
The difference is not just in tax treatment, it is in how job loss is viewed.
“In many economies, unemployment is treated as a systemic risk. In India, it is still largely treated as an individual burden,” Alok Mohanty a former senior labour economist, tells us.
India’s white-collar workforce is beginning to feel that burden more acutely. Layoffs in sectors such as technology, startups, and even global firms operating in India have made job loss less of an exception and more of a recurring reality. Yet, the policy framework has not kept pace with this disruption.
There is absolutely no universal unemployment insurance for salaried professionals, zero structured income replacement, and no institutional buffer that kicks in once severance runs out. What this means is that severance is often the "only" cushion. And even that is taxed!
A DEEPER NUANCE
To be fair, India does offer tax reliefs in specific cases, such as voluntary retirement schemes or retrenchment compensation under certain conditions. But these are narrow in scope and capped, leaving most salaried employees outside their ambit.
This creates a deeper question about how the system views work and risk. Globally, there is increasing recognition that layoffs are often driven by business cycles, automation, or restructuring rather than individual performance. In that context, severance is seen as a temporary safeguard.
India’s framework has yet to fully reflect that shift. Here, we have tax cuts for businesses, we have incentives for investment, but when it comes to job loss, there is no equivalent of insurance. That is the contradiction at the heart of the system.
Because losing a job is not just a financial event, it's a disruption that affects households, stability, and long-term security. Until policy begins to treat it that way, the impact will continue to be felt twice.
First, when the salary stops. And then again, when the safety net shrinks.