Laid Off Mid-Year? How to File Your ITR with Partial Salary, Severance & EPF Withdrawal (AY 2026-27)

You worked part of FY 2025-26, got laid off, maybe withdrew some EPF, maybe did a little freelancing while job hunting. Now the ITR deadline is approaching and your situation fits none of the standard guides — they all assume twelve tidy months of salary. This one doesn't. Here's how to file when your year broke in the middle, and why doing it carefully usually ends in a refund.

The good news first: you probably overpaid tax

Your employer deducted TDS every month assuming you'd earn that salary for the full year. You didn't. Your actual total income is lower than what the TDS was calibrated for — which means, for most people laid off mid-year, the government owes you money, not the other way around. But the refund isn't automatic. You get it only by filing the return, and only by filing it correctly. That's the whole reason to read on.

And with the new regime's Section 87A rebate making income up to ₹12 lakh effectively tax-free this year (₹12.75 lakh for salaried, after the ₹75,000 standard deduction), a salary that stopped in the middle of the year quite often lands your total income under the line — in which case every rupee of TDS comes back.

Step 1: Inventory every income stream from the broken year

A layoff year scatters your income into pieces. List them all before touching the portal:

• Salary till your last working day — from your Form 16. If you joined another company later in the year, you have two Form 16s and an extra set of pitfalls — see our companion guide on filing with two Form 16s.
• Severance, notice pay, leave encashment, gratuity — each taxed differently, and partly exempt if claimed right. We've covered this fully in our severance tax guide (Section 10(10B), Section 89 relief via Form 10E) — apply those exemptions before you compute anything here.
• EPF withdrawal — the big one people get wrong. Covered in Step 2.
• Bank FD/savings interest — the emergency fund you leaned on earned interest; it's in your AIS and must be reported. Savings interest gets a deduction up to ₹10,000 under 80TTA only in the old regime.
• Freelance or consulting income during the gap — even a few small projects. Covered in Step 3, because it can change which ITR form you file.
• Unemployment allowance, if you claimed under ESIC's Atal Beemit Vyakti Kalyan Yojana.

Cross-check the whole list against your AIS (Annual Information Statement) on the e-filing portal. Anything in the AIS that's missing from your return is a future notice; anything you know about that the AIS missed should still be reported.

Step 2: The EPF withdrawal — taxable or not?

Many people dip into EPF after a layoff. The tax treatment hinges on one number: five years of continuous service (service with previous employers counts if you transferred the PF balance rather than withdrawing it).

• 5 years or more: the withdrawal is fully exempt. Report it as exempt income; nothing to pay.
• Less than 5 years: the withdrawal is taxable — and messier than people expect. The employer's contribution plus interest on it is taxable as salary; interest on your own contribution is taxable as other income; and your own contributions are taxable only to the extent you claimed 80C deductions on them in earlier years. The EPFO deducts 10% TDS under Section 192A on taxable withdrawals above ₹50,000 (if PAN is linked) — but that 10% is rarely your actual slab liability, so the true-up happens in your ITR.
• The exception worth knowing: if your service was terminated due to ill health, or the employer discontinuing business, or other causes beyond your control — language that covers many retrenchment situations — the withdrawal can be exempt even under 5 years. If your exit was a layoff, this rule may apply to you; keep your termination letter as evidence and consider a CA's opinion before claiming it, since it's fact-dependent.

Also note: a partial advance from EPF for reasons like unemployment (EPF rules allow withdrawing up to 75% of the balance after one month of unemployment) is treated differently from a full settlement — advances under the scheme's permitted purposes are generally not taxable. Know which one you actually took; your EPF passbook shows it.

Step 3: Freelance income during the gap — small money, big form question

If you earned any business or professional income — consulting, freelance projects, gig work — ITR-1 is off the table. You'll file ITR-4 (if you use presumptive taxation) or ITR-3. For most professionals, the clean route is Section 44ADA presumptive taxation: declare 50% of your gross professional receipts as income, no books of account needed, available for receipts up to ₹50 lakh (₹75 lakh if almost all receipts are digital). A few clients may also have deducted 10% TDS under 194J on your invoices — it's sitting in your 26AS; claim it.

If your gap-period earnings were trivial (a one-off ₹20,000 project), it's tempting to skip this. Don't — it's in the AIS if the client deducted TDS or reported the payment, and the mismatch costs more in headache than the tax itself.

Step 4: Choose the regime with fresh eyes

A broken year changes the regime math. The old regime's advantage comes from deductions — HRA, 80C, home-loan interest, 80D — but several of these shrink in a layoff year: no salary means no HRA exemption for those months, and you may have paused 80C investments. Meanwhile the new regime's ₹12 lakh rebate line is easier to get under with a partial-year income. Run both computations — the portal shows the comparison — rather than repeating last year's choice by habit. One deduction worth remembering in the old regime: if you bought a personal health insurance policy after losing your corporate cover (which you should have — see our first-24-hours guide), the premium is deductible under 80D up to ₹25,000 (₹50,000 for senior-citizen parents).

Step 5: File, verify, and track the refund

• File by July 31, 2026 — filing on time preserves your right to choose the regime and avoids late fees under 234F.
• If claiming Section 89 relief on severance, remember: Form 10E first, ITR second.
• E-verify within 30 days (Aadhaar OTP is instant) — an unverified return is treated as never filed, and so is your refund claim.
• Make sure the bank account selected for the refund is pre-validated on the portal and still active — a common failure point when people close salary accounts after leaving a company. Refunds for straightforward returns typically arrive within a few weeks of processing.

The 60-second version

Laid off mid-year usually means TDS was over-deducted — file to get it back. List every income piece: partial salary, severance (apply the exemptions from our severance guide), EPF withdrawal (5-year rule, with a termination-beyond-your-control exception), bank interest, and any freelance income (which moves you to ITR-4/ITR-3, usually via 44ADA). Reconcile everything against AIS and 26AS, re-run the regime comparison for your changed numbers, file by July 31, e-verify, and keep the refund bank account pre-validated. The system won't volunteer your refund — the return is how you ask.

This article is general information for AY 2026-27, not tax advice. Layoff-year returns combine several fact-dependent rules — if your severance or EPF amounts are large, one consultation with a chartered accountant is worth the fee.