Kavitha urges FM to waive income tax on severance package of fired employees

Hyderabad: Telangana Jagruthi President K Kavitha has requested Union Finance Minister Nirmala Sitharaman to grant a one-time waiver on the income tax on severance packages of employees who have been fired, highlighting extensive layoffs happening in India’s private sector.

In her letter to the Finance Minister, Kavitha expressed concern over the absence of “meaningful tax relief” for dismissed employees under the new tax regime, noting that immediate taxation creates an unfair situation. She pointed out that income tax on severance packages is applied under Section 18(1)(a) of the Income Tax Act, 2025, classified as profits in lieu of salary.

In her earlier post on X on April 2, Kavitha had stated that severance packages were currently taxed under the head “profits in lieu of salary” as per the Income Tax Act, 1961. She said that it resulted in employees being taxed at the very moment they lose their source of income, when financial vulnerability is at its peak. “While existing provisions provide limited exemptions depending on how severance is structured, they are neither adequate nor responsive to the realities of sudden and large-scale layoffs,” she had noted then.

Deeply concerned: Kavitha

“I am writing to you with deep concern regarding the thousands of employees across our country who are facing sudden job losses in an increasingly volatile economic landscape. These are hardworking individuals who have contributed diligently to our nation’s growth, remained steadfast in their tax compliance, and upheld their responsibilities as citizens,” Kavitha stated in her letter to Sitharaman.

She explained, “As you are aware, under the framework of the Income Tax Act, 2025, severance compensation is brought to tax under Section 18(1)(a) as ‘profits in lieu of salary.’ This ensures that severance receipts are taxed at the applicable slab rates. Even under the new tax regime, wherein exemptions have been rationalised for simplicity, the result is that employees facing termination find themselves with almost no avenues for meaningful tax relief at their most vulnerable hour.”

Kavitha cautioned that taxing severance packages limits the net support available during unemployment, as lump-sum payouts can push recipients into higher tax brackets.

“This creates a deeply inequitable situation. At the precise moment an individual loses their steady source of livelihood, the severance amount intended to be a vital financial cushion is significantly depleted by immediate taxation. This burden is particularly acute in cases of lump-sum payouts, where the receipt can push an individual into a higher tax bracket, further reducing the net support available to them during their period of unemployment,” she wrote.

She added, “Given the gravity of the current situation, I believe that incremental measures will not suffice. What is required is a decisive, one-time intervention. I strongly submit that a complete, temporary tax exemption be granted on severance compensation for individuals affected by layoffs for a defined period.”

Lack of compliance with labour laws

In her earlier post on X, Kavitha had pointed out that one concerning trend was the role of the government in supporting those impacted by large-scale layoffs and the other was ensuring strict compliance with labour laws.

She felt the need to ensure that due process, notice requirements and compensation norms have been properly followed.

She cited recent reports that indicated that the Oracle layoffs, driven by a global restructuring aligned with artificial intelligence (AI) and cloud investments, have impacted thousands of professionals across India, including a significant number in Hyderabad.

“We are receiving reports from affected employees alleging that established procedures may not have been fully adhered to. These concerns must be examined seriously and transparently,” she had stressed.

She also felt the urgent need for a dedicated framework to address AI-driven job displacement, built on three pillars – “National & State-Level Tracking Mechanism, Social Protection & Transition Support, and Preventive Policy Through Industry Engagement & Targeted Skilling.”

(With inputs from ANI)