---
title: "What Is Severance Pay in India? Rules & Calculation"
url: https://www.wisemonk.io/glossary/what-is-severance-pay
lang: en
---

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# What is severance pay?

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**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.

| Feature | Severance (retrenchment) | Gratuity |
| --- | --- | --- |
| Trigger | Involuntary role loss | Service milestone |
| Basis | 15 days' pay per year | 15 days' pay per year, with conditions |
| Applies on resignation | No | Yes, if eligible |

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

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