Tax on Severance Pay in India: Section 10(10B), Section 89 Relief & the Refund Most Laid-Off Employees Never Claim (AY 2026-27)
Getting laid off is hard enough. Then the severance lands in your account — 3, 4, 6 months of pay in one lump sum — and a big chunk vanishes as TDS. Most people accept this as unavoidable. It often isn't. Indian tax law has specific reliefs for retrenchment compensation and lump-sum payouts that neither your employer's payroll team nor the ITR portal will apply for you automatically. This guide explains each one in plain language, for AY 2026-27. First, understand what your "severance" actually contains Your full and final settlement is not one payment — it's several components stapled together, and each one is taxed differently : Retrenchment / severance compensation — the "X months of pay" part. Partially exempt under Section 10(10B), explained below. Notice pay (pay in lieu of notice) — fully taxable as salary. No exemption. Leave encashment — exempt up to ₹25 lakh (for non-government employees, computed per the Section 10(10AA) formula). ...