Severance Pay Tax Rules: Advance Tax Still Applies
ITAT Confirms Severance Packages Are Taxable Income
Employees Must Follow Advance Tax Schedule Despite Job Loss
By Our Legal Correspondent
New Delhi: March 09, 2026:
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Severance pay is often seen as a financial cushion for employees who lose their jobs. However, the Income Tax Act, 1961 treats severance packages as taxable income under Section 17(3)(i), categorizing them as “profits in lieu of salary.” This means that employees receiving severance must pay advance tax if their total tax liability exceeds ₹10,000 in a financial year.
The recent ruling by the ITAT Hyderabad Bench in November 2025 reinforced this principle, rejecting claims that severance pay should be exempt from taxation. The Tribunal clarified that unless a specific exemption under Section 10 applies, severance payments are taxable and subject to advance tax obligations.
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What the Law Says
- Section 17(3)(i): Defines severance pay as part of salary income.
- Advance Tax Rule: If tax liability exceeds ₹10,000, advance tax must be paid in instalments.
- Exemptions: Only specific cases under Section 10 (like retrenchment compensation under the Industrial Disputes Act) may qualify for partial relief.
Advance Tax Schedule in India
Employees receiving severance pay must follow the advance tax schedule:
|
Due Date |
Minimum Advance Tax Payment |
|
15th June |
15% of estimated tax liability |
|
15th September |
45% of estimated tax liability |
|
15th December |
75% of estimated tax liability |
|
15th March |
100% of estimated tax liability |
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Failure to pay advance tax can result in interest under Sections 234B and 234C of the Income Tax Act.
Impact of the Ruling
- For Employees: Severance pay must be included in taxable income, and advance tax obligations apply.
- For Employers: Need to issue proper Form 16 and deduct tax at source (TDS) where applicable.
- For Tax Authorities: Reinforces clarity in treatment of severance packages, reducing disputes.
Practical Example
An employee receives ₹26 lakh severance pay. If their total tax liability for the year is ₹6 lakh, they must pay advance tax in instalments as per the schedule. Failure to do so could lead to penalties and interest.
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Conclusion
The ITAT’s ruling makes it clear that severance pay is taxable and subject to advance tax obligations. Employees must plan their finances carefully, calculate their liability, and pay advance tax on time to avoid penalties. This judgment ensures consistency in tax administration and reinforces the principle that job loss does not exempt one from tax compliance.
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