Retrenchment Compensation Calculator

What retrenchment means in Indian law

Retrenchment is the employer ending the service of a worker for any reason other than punishment through a disciplinary process. In plain terms it is the legal name for a layoff driven by business reasons: a role going away, a site closing, a restructuring, or a cost cut. Because the worker did nothing wrong, the law attaches a price to the decision, and that price is the compensation this calculator works out.

The rule used to sit in Section 25F of the Industrial Disputes Act, 1947. It now sits in Section 70 of the Industrial Relations Code, 2020, which came into force on 21 November 2025 along with the other three labour codes. The core arithmetic did not change: 15 days of average pay for every completed year of continuous service, plus one month of notice or wages in lieu of it.

Who is covered

The protection runs to a worker, not to every employee. Under the Industrial Relations Code a worker is a person employed for hire or reward in an industry, and the definition now expressly takes in sales promotion employees, working journalists, and supervisors drawing up to Rs 18,000 a month. It leaves out people employed in a managerial or administrative capacity, and supervisors whose wages cross Rs 18,000 a month.

The second gate is service length. The worker must have completed one year of continuous service. Under Section 25B of the old Industrial Disputes Act, actually working 240 days in the preceding 12 calendar months counted as a year (190 days in a mine), and that remains the usual benchmark under the Code. Days lost to sickness, authorised leave, an accident, a legal strike or a lockout do not break the chain.

The formula

A worked example (the sample values)

Take a worker with basic plus DA of Rs 40,000 a month who has put in 6 years and 7 months, in a factory with 180 workers, retrenched without being asked to serve notice.

• Daily average pay: 40,000 ÷ 26 = Rs 1,538.46
• Qualifying years: 6 completed years, and the leftover 7 months is more than 6, so 7 years
• Compensation: 1,538.46 × 15 × 7 = Rs 1,61,538
• Notice pay in lieu of one month: Rs 40,000
• Re-skilling fund credit: 1,538.46 × 15 = Rs 23,077
• Total: Rs 2,24,615, before gratuity, leave encashment and unpaid salary

If the same worker had 6 years and 4 months, the leftover part would not cross 6 months, the qualifying years would stay at 6, and the compensation would fall to Rs 1,38,462. The six month line is worth real money, so check your date of joining and your last working day carefully.

Notice, and the 300 worker line

Compensation on its own is not enough. The employer must also give one month of written notice setting out the reasons for the retrenchment, or pay wages for that month instead. In an establishment with 300 or more workers the notice period stretches to three months, and the employer additionally needs prior permission from the appropriate government before retrenching at all. The threshold used to be 100 workers and was raised to 300 by the Industrial Relations Code.

There is also an ordering rule that survives from the old law. Where workers of the same category are being retrenched, the employer is ordinarily expected to go last in first out, and to give retrenched workers an opportunity if the same category of role is filled again later.

The worker re-skilling fund

Section 83 of the Industrial Relations Code adds something the old Act did not have. For every retrenched worker the employer contributes 15 days of the wages last drawn by that worker to a worker re-skilling fund, and the amount is to be credited to the worker's account within 45 days of the retrenchment. It is a flat 15 days no matter how long the person served, and it sits on top of the compensation rather than inside it.

Because the fund is new, the mechanics of crediting and claiming are still being notified in detail by the central and state governments. Treat the figure in the calculator as the statutory contribution amount rather than as cash you can count on receiving on day one.

Tax on retrenchment compensation

From 1 April 2026 the exemption is in the table under Section 19 of the Income-tax Act, 2025 (earlier Section 10(10B) of the 1961 Act). It covers the least of three amounts:

1. the compensation you actually received;
2. the amount computed under the labour law formula (Section 25F(b) of the old Act, now Section 70 of the IR Code), that is, the 15 days per year statutory figure; and
3. Rs 5,00,000.

The Rs 5,00,000 is a limit notified by the Central Government. Anything above the exempt amount is taxed as salary in the year of receipt. Notice pay is fully taxable, and so is any ex gratia or goodwill amount your employer adds beyond the statutory figure, unless a specific approved scheme applies.

Old Act and new Code, side by side

For employers planning a restructuring

Budget for all three statutory pieces per worker (compensation, notice pay and the re-skilling contribution), plus gratuity and leave. Keep the seniority list and reasons on file, and where roles reopen later, the law expects retrenched workers to be offered them first. When you do rehire, an applicant tracking system makes it easy to find and recontact former staff.

What else you should be paid on exit

Retrenchment compensation is one line in a larger settlement. On the way out you should also see unpaid salary up to the last working day, encashment of the earned leave balance, gratuity if you have five years of continuous service, any statutory bonus that has accrued, pending reimbursements, and your provident fund balance to withdraw or transfer. Under Section 17(2) of the Code on Wages, 2019 the wage components of a final settlement are due within two working days of the last day, while gratuity has its own 30 day timeline.

• Gratuity Calculator for the 15/26 payment (5 years, or 1 year for fixed-term staff)
• Full and Final Settlement Calculator for the complete exit payout
• Leave Encashment Calculator for the unused earned leave balance
• Notice Period Buyout Calculator if you are the one leaving early
• PF Withdrawal Calculator for the provident fund balance and TDS on it

Assumptions this calculator makes

• You are a worker as defined by the Industrial Relations Code, 2020, and not in a managerial or administrative role.
• Wages mean basic pay plus dearness allowance plus any retaining allowance, with the 50 percent ceiling rule of the labour codes applied when you switch it on.
• Compensation is 15 days of average pay per qualifying year, with a leftover part of more than 6 months counted as a full year.
• Notice pay, where you select it, is one month of wages, or three months in an establishment of 300 or more workers.
• The full Rs 5,00,000 exemption limit is treated as available to you.
• State rules, settlements, standing orders, and your own contract can all be more generous than the statute, and the higher of the two applies.

Frequently asked questions