Retrenchment Compensation

Allowances in Salary

Under the Industrial Disputes Act, retrenchment is defined as the termination of a worker’s employment by an employer for any reason other than voluntary retirement, reaching retirement age, or disciplinary action. This includes layoffs due to downsizing, closure of a business, or a reduction in the workforce for any other reason.

It is a form of financial compensation provided to employees who have been retrenched from their jobs. However, in order to receive retrenchment compensation, the employee should have been working for the employer for a continuous period of at least 1 year.

Calculation for exemption for retrenchment compensation

The LEAST of the following amounts is allowed as exemption for retrenchment compensation received by the employee:

(i) Actual retrenchment compensation received

(ii) Compensation equivalent to 15 days average salary {based on average salary of last 3 months} for every completed year or part thereof in excess of 6 months

(iii) Maximum amount as prescribed by the government i.e. Rs. 5,00,000