What is severance pay?

Severance pay is compensation an employer provides to an employee whose role is ended involuntarily, typically through redundancy or retrenchment rather than resignation or dismissal for cause. In India, where a termination amounts to retrenchment, the law sets a formula for retrenchment compensation, separate from gratuity and other dues. Understanding what severance covers, and how it differs from gratuity, helps employers plan exit costs and stay compliant when reducing a team.

How is severance pay calculated in India?

For qualifying retrenchment, the law provides a defined formula rather than leaving it entirely to the employer. The key points are these.

• Statutory formula: retrenchment compensation is generally 15 days' average pay for each completed year of continuous service.
• Notice or pay in lieu: the employee is also entitled to notice, or pay in place of notice.
• Eligibility conditions: statutory retrenchment compensation usually applies after a minimum period of continuous service.

Severance pay vs gratuity

Both are paid around an exit, but they are different entitlements with different triggers. The distinction matters for costing an exit.

• Trigger: severance applies to involuntary loss of a role, while gratuity is a service-based reward paid on most exits after enough years.
• Can both apply: a retrenched employee may receive both retrenchment compensation and gratuity if eligible.
• Part of settlement: both are settled alongside other dues in the full and final settlement.

Severance and gratuity at a glance

The table summarizes how the two payments differ in trigger and basis.

This information is for general guidance. Confirm current rules and consult legal experts for your specific situation.