Tata Consultancy Services (TCS), India’s largest IT services firm, is undergoing a significant workforce restructuring, impacting approximately 12,000 employees—roughly 2% of its global workforce.
The layoffs, which began in August and continued through September 2025, are part of the company’s strategy to align talent with evolving client demands and emerging technologies such as AI and cloud computing.
Affected employees include those whose skills have become redundant or who have not upskilled in line with business needs.
While layoffs in the IT sector are not new, the scale and structure of TCS’s severance packages have drawn attention—especially due to the unexpected tax implications that come with them.
TCS Severance Packages: Generous but Complex
TCS is offering tiered severance packages based on tenure:
- Bench Employees (unassigned for over 8 months): Receive only three months’ notice pay.
- Employees with 10–15 years of service: Eligible for 1.5 years’ salary as severance.
- Senior employees (15+ years): May receive up to two years’ salary.
- Early retirees: Offered full benefits plus six months to two years’ salary.
In addition to financial compensation, TCS is providing outplacement services, covering agency fees for three months, and mental health support through its “TCS Cares” program.
Tax Surprise: Severance Pay Treated as Salary
While the severance packages are substantial, many employees are discovering that the payouts are fully taxable.
Under Section 17(3)(i) of the Income Tax Act, 1961, severance pay is classified as “profits in lieu of salary” and taxed according to the employee’s applicable slab rate.
Employers must deduct Tax Deducted at Source (TDS) before they release the payment.
The tax authorities treat the payout as a lump sum in the year of receipt, even if it spans multiple years of salary, potentially pushing employees into higher tax brackets.
Limited Relief Under Income Tax Rules
Some relief is available, but only under specific conditions:
- Section 10(10C): Offers ₹5 lakh exemption for employees opting for Voluntary Retirement Scheme (VRS), provided the scheme meets criteria under Rule 2BA.
- Section 10(10AA): Exempts leave encashment.
- Section 10(10): Exempts gratuity.
- Section 89 with Rule 21A: Allows tax relief by spreading income over previous years—but this cannot be combined with Section 10(10C) benefits.
- Experts caution that clear documentation is essential. “The breakup of the severance package must be clearly written in the relieving or termination letter,” says Sujit Bangar, founder of Taxbuddy.com. . Without this, the tax department may question the employee during scrutiny.
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