How to handle redundancy in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Redundancy in India does not follow a single, simple process. Whether you can let an employee go, how much you must pay, and what approvals you need depend on the size of your business, the nature of the role, and which law applies — so treat this article as an orientation, not a substitute for legal advice.
What "redundancy" means under Indian law
India does not use the word "redundancy" in its labour statutes the way the UK does. The closest equivalents are retrenchment (termination of surplus employees) and closure (shutting down an establishment). Both are governed primarily by the Industrial Disputes Act, 1947 — now being consolidated into the Industrial Relations Code under India's four Labour Codes, which came into force in 2025.
The key distinction in Indian law is between workmen and non-workmen (managerial or supervisory staff). Statutory retrenchment protections apply primarily to workmen. For senior employees on fixed-term contracts or in managerial roles, the terms of their employment contract usually govern exit.
Rules for retrenchment of workmen
For employees classified as workmen, the Industrial Relations Code sets out clear obligations:
Notice or pay in lieu. You must give the required notice period or pay the equivalent wages in lieu of notice.
Retrenchment compensation. A retrenched workman is entitled to compensation equivalent to 15 days' average pay for every completed year of continuous service, or part of a year exceeding six months. This is a statutory floor, not a negotiated number.
Last-in, first-out. As a rule, you must retrench the most recently hired employees first within the relevant category, unless there is a reasonable and recorded basis to depart from this.
Prior government permission for larger establishments. Establishments employing 100 or more workmen (the threshold may change once state governments notify the Labour Code rules) are required to seek prior permission from the appropriate government authority before carrying out retrenchment or closure. This permission process can take time and may not always be granted, so plan well ahead if this applies to you.
Severance and final settlement
Beyond retrenchment compensation, the final settlement for a departing employee typically includes:
- Outstanding salary up to the last working day
- Leave encashment for any earned leave not taken
- Gratuity, if the employee has completed five years of continuous service — this is a separate statutory entitlement and is not waived or replaced by retrenchment compensation
- Provident Fund settlement — the employer's 12% and employee's 12% EPF contributions must be correctly accounted for, and the employee should be guided on transferring or withdrawing their PF account
Get the full and final settlement letter signed by the employee where possible. This is important for your records and reduces the risk of a future dispute.
Tax and payroll implications
Retrenchment compensation received by an employee is exempt from income tax up to specified limits under the Income Tax Act. Any amount above that limit is taxable in the employee's hands. As the employer, your obligation is to deduct TDS correctly on any taxable portion of the settlement payment, reflect it accurately in Form 24Q, and issue Form 16 at year end. If the departure happens mid-year, you will need to account for the employee's total taxable income for 2026/27 to calculate TDS correctly on the final payment.
Errors in the final payroll run are common — missed leave encashment, incorrect gratuity calculations, or PF not closed out properly. Run a checklist before you process the last payment.
Practical steps before you act
Document the business reason. Whether the role is redundant due to restructuring, technology change, or a business downturn, write it down clearly. Vague or inconsistent reasons are the most common source of legal challenge.
Check your contractual obligations. Employment contracts, HR policies, and any applicable standing orders may grant rights over and above the statutory minimum. Honour those.
Consult a labour lawyer early. If you have 50 or more employees, or if the affected employees are represented by a union, get legal advice before you communicate anything. The sequencing of consultation, notice, and paperwork matters.
Keep communication factual and respectful. Redundancy is difficult for the person losing their job. Communicate the decision directly, explain the business reason honestly, and give the employee time to ask questions.
Maintain records. Keep copies of all notices, acknowledgements, calculations, and correspondence. If a former employee raises a claim before a labour tribunal, your documentation will determine how defensible your position is.
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