The start of 2023 has been difficult for technology employees worldwide, with 91 companies laying off over 24,000 tech staff in the first 15 days of the month. This is a sign of worse times to come. It has been reported that 24,151 tech workers have lost their jobs, with companies such as Amazon, Salesforce, and Coinbase leading the way.
With the growing number of layoffs, more people would be worried about the tax implications relating to severance pay. Normally, severance pay would be liable to tax in the hands of the employee. However, the tax provisions give exemptions from taxation to employees up to certain limits for payments received under the Provisions of the Industrial Disputes Act as retrenchment compensation or VRS payments that qualify for section 10(10C). For this the employee needs to have these schemes framed as per the guidelines mentioned in those sections and meetings conditions mentioned therein.
Severance pay received by an employee from an employer is taxed in the hands of the employee as Profits-In-Lieu under the head Salaries under Section 17 (3) (i) of the Income Tax Act, 1961. As per section 17(3) of the Income Tax Act, any payment received by a taxpayer due to the termination of her employment is considered as profits in lieu of salary. Such profits attract tax in the same manner as salary is taxed. Consequently, the employer may deduct TDS on the severance pay.
However, if the employer under the scheme of voluntary retirement pays the severance payment it will be exempt subject to maximum of Rs. 5,00,000 under section 10(10C) of the Income Tax Act, 1961.
In some cases, the severance pay is received from any third party, who is not the employer, such amount received would be subjected to tax as ‘Income from other sources’ as there is no employer-employee relationship.
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