Laid Off in India: What You Are Owed, and the Tax on Severance, Notice Pay, Gratuity, Leave Encashment and PF

A layoff ends one way: with a full and final settlement. Salary to the last day, notice pay, a severance package, gratuity, leave encashment, a share of the bonus and the provident fund all land within a few weeks, and each is taxed differently. This guide sets out what the law says you must be paid and by when, how each payment is taxed under the Income-tax Act, 2025, a worked example with every rupee, what to do about PF and a new job in the same year, and the layoffs behind this week's news, including what Microsoft actually announced.

Written on 28 October 2026. The law is from the text of the Income-tax Act, 2025 (sections 15, 17, 18, 19, 157, 202 and 392, and Schedule XI) and the Income-tax Rules, 2026 (rules 20 and 73) on the Income Tax Department's site; the Code on Wages, 2019, the Industrial Relations Code, 2020 and its 2026 amendment, and the Code on Social Security, 2020, as published by the Labour Ministry with its FAQs; and the EPFO board's decisions as announced through the Press Information Bureau. The layoff and jobs figures are from company statements and results, the Periodic Labour Force Survey, Naukri JobSpeak, NASSCOM, the US Bureau of Labor Statistics and Challenger, Gray & Christmas; where no company statement exists, the news organisation that reported the figure is named. This explains the law in general; it is not legal or tax advice on your own case.

Who is cutting jobs, and how many

Microsoft: a voluntary exit offer, not a fresh layoff of 6,000

The Microsoft news behind this week's searches is not a new layoff. On 26 October 2026 its Chief People Officer, Amy Coleman, announced a Voluntary Exit Offer: a "time-limited, voluntary program" for eligible employees "in participating teams in Canada, India, the United Kingdom and the United States at level 70 and below". Not every part of the company is taking part: "Some organizations are providing the Voluntary Exit Offer, and some are not."

Microsoft's post gives no number. Reports in Seattle put the employees eligible at about 60,000, roughly a quarter of its workforce of about 223,000 (its annual report for the year to 30 June 2026 gives 121,000 in the United States and 102,000 elsewhere). A Microsoft spokesperson called it "a standard severance offer" and said similar companies that made similar offers "saw closer to 5%-6% of employees leave". If that held at Microsoft, it would mean roughly 3,000 to 3,600 people. That is an illustration from the spokesperson's comparison, not a figure Microsoft has given.

In India, Business Standard reported that the offer includes "one month of base salary for each completed year of service, health insurance and career transition services", that eligible employees must decide by 1 December, and that Microsoft did not say how many of its Indian staff are eligible.

The 6,000 figure many people remember is from May 2025, when Microsoft cut about 6,000 jobs, some 3% of its workforce. Its other recent rounds:

Other companies

Only figures a company has published, or that a named news organisation has reported, are listed. Several other numbers in circulation rest on social media posts or unnamed estimates and are left out.

India's IT services: still adding people overall

The big Indian IT companies, the country's largest private employers of graduates, reported their headcounts for the quarter to 30 September 2026. Four of the five added people; Wipro's fell.

What the job cuts mean for the economy

The official data so far show a job market that is shifting, not shrinking:

• Unemployment is steady. The Periodic Labour Force Survey put India's unemployment rate at 5.0% in September 2026, against 5.2% a year earlier. In towns and cities it was 6.9% (6.8% a year earlier), and among urban women 9.2%. Unemployment is highest among the young: 15.2% for people aged 15 to 29, and 18.5% for young women.
• White-collar hiring has not fallen, but it has moved. The Naukri JobSpeak index of new job postings stood at 3,053 in September 2026, 2% above a year earlier. Postings for IT and software services were about 4% lower (3,432 against 3,585), while AI and machine-learning roles grew 20%.
• The tech workforce is still growing slowly. NASSCOM's Strategic Review 2026 projected direct tech-sector employment of about 6 million in 2025-26, up 2.3%, a net addition of about 1,35,000 people.
• The cuts are concentrated in technology. In the United States, employers announced 43,281 job cuts in September 2026 and 5,73,195 in the first nine months, 39% fewer than a year earlier (Challenger, Gray & Christmas). Technology accounted for 29% of the year's announced cuts, and AI was cited as a reason in about 21%. US payrolls grew by 29,000 in September and the unemployment rate was 4.2% (Bureau of Labor Statistics).

For a household, none of this softens a layoff. The effect is immediate: the salary stops, and EMIs, insurance and tax decisions arrive within weeks. The rest of this guide covers those.

What you are owed when you are laid off

A layoff ends in a full and final settlement: one statement that adds up everything the employer owes you and takes off what you owe it. The table lists what usually goes into it, who is entitled to each item, and the rule behind it. The rules are in the four labour codes, in force since 21 November 2025, and in the Income-tax Act, 2025.

Are you a "worker"? It decides two of the rows

The Industrial Relations Code protects a worker: anyone employed to do "manual, unskilled, skilled, technical, operational, clerical or supervisory work". It leaves out people employed mainly in a managerial or administrative role, and supervisors earning more than ₹18,000 a month (or a higher figure the Centre notifies). A developer, tester, analyst or support engineer who manages no one can therefore be a worker even on a large salary; a team lead with people reporting to them usually is not. What counts is the work you actually did, not your title.

A worker with a year's service cannot be retrenched without one month's written notice (or pay in its place) and retrenchment compensation of 15 days' average pay for every completed year, with any part of a year over six months counted as a full year. The employer must also pay 15 days' last-drawn wages into the worker re-skilling fund, which the Central Government set up on 8 May 2026, and that money is credited to the retrenched worker within 45 days.

The two-day rule, and what it does not cover

Section 17(2) of the Code on Wages says that when an employee is retrenched or resigns, "the wages payable to him shall be paid within two working days". The Labour Ministry's FAQs say this applies to all employees, not only to low-paid ones. The same Code's definition of wages leaves out gratuity, "retrenchment compensation" and "any ex gratia payment made to him on the termination of employment", so the two-day rule covers your salary and allowances, not the severance package or gratuity. Gratuity has its own deadline of 30 days from the date it becomes payable, with simple interest after that.

Gratuity under the new wage definition

Gratuity is 15 days' wages for every completed year of service, worked out on your last-drawn wages, with any part of a year over six months counted as a full year. Most employers take 15 days as 15/26 of a month's wages. From 21 November 2025, "wages" for gratuity follows the Code on Wages: basic pay, dearness allowance and retaining allowance, and if your other allowances are more than half of your total pay, the excess is added back to wages. The Labour Ministry's FAQs of 16 March 2026 confirm that gratuity is worked out on this definition from that date. If your basic pay is a small share of your salary, your gratuity may be larger than the old formula gave. The ceiling is ₹20 lakh, which the ministry's FAQ calls the amount "currently" notified.

The gratuity calculator works out the amount from your last-drawn wages and years of service.

The tax on each payment

Everything an employer pays you because the job is ending is taxed under the head "Salaries", unless a specific rule makes part of it tax-free. Section 18(1)(a) of the Income-tax Act, 2025 says so directly: "profits in lieu of salary" include "any compensation due to, or received by, an assessee from his employer or former employer at or in connection with the termination of his employment". The tax-free parts are in the table of section 19, and all of them except one (professional tax) are allowed under the new tax regime as well as the old, by section 202(2).

For the two "average salary" tests, salary means basic pay plus dearness allowance if your terms count it, and nothing else (section 19(2)(b)). The ₹20 lakh, ₹25 lakh and ₹5 lakh ceilings are the amounts notified by the Central Government, as the Income Tax Department's tutorial on retirement benefits sets them out. The ₹25 lakh leave ceiling applies across your whole working life, so leave encashment claimed tax-free from an earlier employer reduces what is left (section 19(2)(f)); the same applies to gratuity paid outside the gratuity law (section 19(2)(a)).

Notice pay and severance: taxed in full, unless you are a worker

For most salaried people, the severance package is taxed exactly like salary, at your slab rate, in the year you receive it. The employer deducts tax at source on it under section 392, along with your last month's salary, and the figure appears in your Form 130 (the certificate that replaced Form 16).

The exception is the worker. Section 19's Sl. No. 10 makes compensation "received by a workman at the time of his retrenchment" tax-free up to the least of the amount received, the statutory formula and ₹5 lakh, and it counts compensation paid under "any award, contract of service or otherwise", not only the statutory minimum. The rule still names the Industrial Disputes Act, 1947, which the Industrial Relations Code replaced on 21 November 2025; the Code's definition of a worker and its formula of 15 days' average pay per year are built the same way. Employers rarely apply this in their own tax deduction, because whether you were a worker depends on your duties. You can claim it in your return; keep your appointment letter, your role description and the separation letter.

Voluntary exit offers, such as Microsoft's

A payment for leaving under a voluntary retirement or voluntary separation scheme has its own exemption: up to ₹5 lakh, once in a lifetime (section 19, Table Sl. No. 12). Rule 20 of the Income-tax Rules, 2026 allows it only if the scheme meets all of these conditions:

• it applies to employees who have completed ten years of service or forty years of age;
• it applies to all employees, "including workers and executives", other than directors;
• it is drawn to reduce the overall number of employees, and the vacancies are not filled;
• the employee does not join another company under the same management;
• the payment is no more than three months' salary for each completed year of service, or the salary for the months left until retirement, whichever is less.

An offer made only to some teams, or only up to a certain level, may not meet the second condition, and an employee who has not reached ten years of service or the age of forty may not meet the first. If the scheme does not qualify, the whole payment is taxed as salary under section 18. Take an employee who accepts one month's base pay of ₹2 lakh for each of 10 years: ₹20 lakh. Already in the 30% slab, they pay ₹6,24,000 on it with cess. If ₹5 lakh were tax-free, the tax would be ₹4,68,000, a difference of ₹1,56,000. Ask the employer whether it has framed the scheme under Rule 20 before you count on the exemption. The exemption cannot be combined with relief under section 157 for the same amount.

Provident fund: tax-free even before five years, after a layoff

A PF withdrawal is usually tax-free only after five years of continuous service, counting earlier employers whose balance was transferred in. Paragraph 8 of Part A of Schedule XI adds an exception that matters after a layoff: the balance is also tax-free if "the service was terminated due to" the "contraction or closure of the employer's business" or "other cause beyond the control of the employee". Where neither applies, the EPFO deducts 10% tax from a payout of ₹50,000 or more (section 392(7)). Keep the termination letter: it is your evidence that the exception applies.

Worked example: one layoff, every payment, and the tax

Ritu is an engineering manager in Bengaluru with three developers reporting to her. She joined on 1 February 2020 and is laid off with effect from 31 October 2026, after 6 years and 9 months. She uses the new tax regime and has no other income this year. Her monthly pay:

The company relieves her at once, pays two months' notice and offers three months' gross pay as severance. Her settlement, and the tax on each line:

• Gratuity. Six years and nine months counts as seven years, because the part of a year over six months counts as a full year. Her allowances (₹95,000) are exactly half of her pay, so nothing is added back to wages and gratuity is worked on basic pay. All ₹3,83,654 is tax-free: it is the amount the gratuity law gives, well within ₹20 lakh.
• Leave encashment. The tax-free limit is the least of the leave at credit at her average salary (₹79,167), ten months' average salary (₹9,50,000) and ₹25 lakh, so the whole ₹79,167 is tax-free.
• Notice pay and severance. Both are taxed in full. Ritu manages a team, so she is not a "worker", and the retrenchment exemption does not apply to her.

Of the ₹28,62,821 she receives in the year, ₹4,62,821 is tax-free and the tax is ₹2,92,500, about 10.2% of the cash. Most of that tax is deducted by her employer through the year and from the final settlement; Form 130 shows the total.

If Ritu had been a "worker"

Suppose instead that Ritu were a senior developer with no one reporting to her. Her work would be technical, so she could count as a worker, and part of the severance could be treated as retrenchment compensation. The tax-free amount is the least of the severance received (₹5,70,000), 15 days' average pay for each of her 7 years (₹3,83,654, worked the same way as gratuity) and ₹5 lakh: ₹3,83,654. Her taxable income falls to ₹19,41,346 and her tax to ₹1,95,800, a saving of ₹96,700. She would claim it in her return, with her role description and appointment letter as evidence, because her employer's tax deduction would not have allowed it.

Your PF after a layoff

Your provident fund does not end with the job. The balance keeps earning EPFO's interest (8.25% a year for 2025-26, as recommended by the EPFO's board in March 2026), and it moves to your next employer's account when you transfer it.

In October 2025 the EPFO's Central Board of Trustees changed the withdrawal rules. Its decisions, as announced:

• Full withdrawal of the PF balance after a job loss is allowed after 12 months without employment, in place of the earlier two months; final withdrawal of the pension balance after 36 months.
• Partial withdrawal is allowed under "special circumstances", which include continuous unemployment, and the member no longer has to give a reason. Up to 100% of the eligible balance can be withdrawn, but 25% of the contributions must stay in the account as a minimum balance.
• The minimum service for any partial withdrawal is now 12 months.

The rules that apply are the ones in force on the day you claim; the EPFO member portal shows them. For tax, remember the Schedule XI exception above: if your job ended because the business contracted or closed, the withdrawal is tax-free even before five years of service.

A new job in the same year: tell the new employer

If you find work before 31 March, your two salaries are taxed together. A new employer that knows nothing of the first one deducts tax as if its salary were your only income, and the shortfall falls due when you file your return, with interest.

Ritu, for example, joins a new company on 1 January 2027 at ₹20 lakh a year. The three months add ₹5,00,000 of salary, and her tax for the year rises from ₹2,92,500 to ₹4,44,600: ₹1,52,100 more. Her new employer, seeing only its own ₹5,00,000, would deduct nothing, because ₹5,00,000 less the standard deduction is within the ₹12 lakh rebate. She would owe the whole ₹1,52,100 at the end of the year.

The fix is section 392(4)(a): you can give the new employer the details of salary received from earlier employers in the same tax year, on Form 122 (which replaced Form 12B), and it then deducts the right tax. Only one standard deduction is allowed in the year, however many employers you have.

A large lump sum: relief under section 157

A severance payment can push you into a higher slab than the years whose work it rewards. Section 157(1)(c) allows relief for a payment "in the nature of 'profits in lieu of salary'". You claim it on Form 39 (which replaced Form 10E), given to your employer so that it deducts less, or filed yourself by the due date of your return; Rule 73 of the Income-tax Rules, 2026 sets how the relief is worked out and when it applies. It helps when this year's income is much higher than usual. For Ritu, whose income this year is close to a normal year's, it would make little difference.

The first two weeks: a checklist

1. Get the separation letter in writing. It should give the last working day, the reason (for example "position eliminated" or "restructuring") and the list of payments. The reason matters for the PF exception and, if you are a worker, for retrenchment compensation.
2. Check the settlement against the first table. Salary within two working days, gratuity within 30 days, everything else as the policy or agreement says. Ask for the working of gratuity and leave encashment.
3. Health cover. A group policy usually ends with the job. Before your last day, ask the insurer whether you can move to an individual policy and keep credit for the waiting periods you have already served.
4. PF. Check that your exit date shows on the EPFO portal. Leave the balance where it is unless you need it; transfer it when you join a new employer.
5. Tax papers. Collect Form 130 from your employer, and check the Annual Information Statement on the income-tax portal for the TDS on your settlement.
6. Loans. If an EMI may be missed, speak to the lender before it is, not after.
7. Next job. Give the new employer Form 122 with your earlier salary for the year.
8. Return. Claim the exemptions that apply: gratuity, leave encashment and, if you were a worker, retrenchment compensation.

Frequently Asked Questions

Is severance pay taxable in India? Yes. Under section 18(1)(a) of the Income-tax Act, 2025, compensation from an employer "in connection with the termination of his employment" is profits in lieu of salary and is taxed at your slab rate. Two exceptions: retrenchment compensation paid to a "worker" is tax-free up to the least of the amount, 15 days' average pay for each year of service and ₹5 lakh; and a payment under a voluntary retirement scheme that meets Rule 20 is tax-free up to ₹5 lakh, once in a lifetime.

Is notice pay taxable? Yes, in full, as salary. It is pay for the notice period the company chose not to have you work.

Do I get gratuity if I am laid off? Yes, if you have five years of continuous service; on a fixed-term contract, after one year. It is 15 days' wages for each completed year, counting any part of a year over six months as a full year, and it must be paid within 30 days.

How much gratuity is tax-free? The amount worked out under the gratuity law, up to ₹20 lakh. In the worked example, ₹3,83,654 of gratuity is entirely tax-free.

Is leave encashment taxable when I am laid off? It is tax-free up to the least of the leave at your credit (counting no more than 30 days for each year of service) valued at your average salary, ten months' average salary and ₹25 lakh across your working life. Above that, it is taxed as salary.

When must my company pay my full and final settlement? Your salary and allowances within two working days of the exit, under section 17(2) of the Code on Wages, 2019. Gratuity within 30 days of becoming payable. Severance and bonus as the company's policy or your agreement says.

Can I withdraw my whole PF after a layoff? Under the EPFO board's decisions of October 2025, the whole PF balance can be withdrawn after 12 months without a job, and the pension balance after 36 months. Before that, you can make a partial withdrawal for continuous unemployment without giving reasons, keeping 25% of your contributions in the account. Check the EPFO portal for the rules in force when you claim.

Is PF withdrawal taxable if I am laid off before five years? Not if your service ended because the employer's business contracted or closed, or for another cause beyond your control: paragraph 8 of Schedule XI makes the balance tax-free in that case. Otherwise the EPFO deducts 10% tax from a payout of ₹50,000 or more, and the balance is taxed as salary.

Is Microsoft laying off 6,000 employees in India? Microsoft has not announced that. On 26 October 2026 it announced a Voluntary Exit Offer for eligible employees at level 70 and below in participating teams in Canada, India, the UK and the US; about 60,000 are eligible, according to reports. In India, Business Standard reported one month's base salary for each completed year of service, health insurance and career-transition help, with a decision due by 1 December. The 6,000 figure is from Microsoft's layoff of May 2025.

Is the Microsoft voluntary exit payment tax-free in India? Only up to ₹5 lakh, and only if the scheme meets all the conditions of Rule 20 of the Income-tax Rules, 2026, which include applying to all employees and reducing the overall headcount. If it does not, the whole payment is taxed as salary.

Will I pay less tax because I was laid off in the middle of the year? Often, because fewer months of salary are taxed. But notice pay and severance arrive together and can push you into a higher slab, and if you start a new job before 31 March, both salaries are taxed together. Give the new employer Form 122 so that it deducts the right tax.

The rates are those of the new tax regime for the tax year 2026-27 (section 202), with 4% health and education cess. The labour-code rules apply from 21 November 2025, when the codes came into force. A company's own policy or your agreement can give you more than the law requires, never less. For a large settlement, or a dispute over whether you were a "worker", take advice on your own facts.