How do you terminate an employee in India in 2026?
India runs two separate severance tracks that stack: retrenchment compensation kicks in after just 1 year of service, then gratuity adds a second payment after 5 years. Both are mandatory, both use a 15 days-per-year formula, and getting the classification between workman and non-workman wrong makes the whole process void.
· India guide
Illustration · Mumbai, India
India has two separate mandatory severance payments. Retrenchment compensation applies to workmen who have completed 1 year of continuous service. The rate is 15 days average wages for every completed year. Gratuity applies to all employees who have completed 5 years. The gratuity rate is 15 days of last drawn basic salary, divided by 26 working days, for every year of service. Both payments can fall due on the same termination (Industrial Relations Code 2020).
Notice requirements depend on establishment size. Employers must give 30 days written notice before retrenching a workman in an establishment of fewer than 300 workers. At 300 or more workers, notice rises to 90 days. Prior government permission is also required. Apply at least 60 days before the proposed retrenchment date.
A new Re-skilling Fund took effect on 21 November 2025. Employers must deposit 15 days wages per retrenched worker into the fund within 45 days of retrenchment. Final wages must be paid within 2 days working days of the termination date.
What grounds justify termination in India?
India splits employees into two groups. Workmen are anyone not doing managerial, supervisory, or administrative work. They are protected by the Industrial Relations Code 2020. Non-workmen are governed by their employment contracts and state Shops and Establishments Acts.
You can retrench a workman only for genuine operational reasons. You must follow the last-in-first-out (LIFO) rule, pay retrenchment compensation, and serve the required notice. Dismissal for misconduct follows a separate domestic enquiry procedure.
Workman or non-workman: why classification matters
The workman/non-workman divide is the first question in every Indian termination. If you misclassify a manager as a non-workman and dismiss them without following the Industrial Relations Code, a labour court can void the termination and order reinstatement with full back pay. The classification turns on the actual duties performed, not the job title.
Grounds for retrenchment (workmen)
- Redundancy, genuine reduction in workforce on operational grounds
- Closure of establishment or permanent shutdown of a department
- Lay-off, temporary suspension of work for reasons beyond the employer's control
Grounds for dismissal for cause (workmen)
Misconduct dismissal requires a domestic enquiry: a written charge sheet, opportunity to respond, a fair enquiry hearing, and a finding before dismissal is imposed. Valid grounds include theft, fraud, habitual absence, insubordination, and violence. Skipping the enquiry converts a cause-dismissal into an unlawful one, entitling the workman to reinstatement and back wages before a labour court.
Unfair dismissal protection
Workmen who have completed 12 months of continuous service (at least 240 working days) have full retrenchment-procedure protection. Termination before 12 months is possible but must still comply with any applicable state Shops Act and the employment contract. Non-workmen have contractual remedies only.
Protected categories include pregnancy (a woman cannot be dismissed during maternity leave under the Code on Social Security 2020), trade union activity, and filing a grievance. Dismissal on these grounds invites reinstatement orders.
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Classify the employee
Determine whether the employee is a workman or non-workman under the Industrial Relations Code 2020. The classification turns on actual duties, not the job title, and it controls every subsequent step.
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Confirm valid grounds
Anchor the termination to a recognised ground: retrenchment for operational reasons (with LIFO selection), misconduct after a domestic enquiry, or contract expiry. A void reason entitles the workman to reinstatement.
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Check the headcount threshold
Count the average number of workers at the establishment. At the statutory threshold or above, file for government permission before serving any notice; below the threshold, notify the labour authority and proceed.
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Serve notice and calculate compensation
Give the required written notice, or pay wages in lieu. Calculate retrenchment compensation for qualifying workmen, and gratuity for any employee who meets the service requirement. Include the Re-skilling Fund deposit in your cost plan.
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Pay the full and final settlement
Issue all dues, including notice pay, earned leave encashment, retrenchment compensation, and gratuity where owed, within the statutory deadline. File EPF and ESI closing returns with EPFO.
How much notice must you give in India?
Notice requirements depend on establishment size. Fewer than 300 workers: give 30 days written notice, or pay it out. 300 or more workers: give 90 days notice and get prior government permission. Apply for permission at least 60 days before the proposed date.
You can pay out the notice period instead of working it, anywhere in India. Non-workmen follow their contract and state Shops Acts. That is typically 30 days to 90 days depending on seniority.
| Establishment size | Statutory notice (retrenchment) | Government approval required? |
|---|---|---|
| Fewer than 300 workers | 30 days | No |
| 300 or more workers | 90 days | Yes, applied 60 days in advance |
These are minimums for workmen on retrenchment. Contractual notice periods, especially for senior non-workmen, routinely run 30 to 90 days and occasionally longer for executive roles. The contract cannot reduce statutory protections for workmen below these floors.
During probation
There is no central statutory minimum notice required to terminate a probationary employee; the applicable rules come from the employment contract and any state Shops and Establishments Act. Industry practice is typically 7 to 14 days by contract. Probation customarily runs up to 6 months, with contracts sometimes extending to 12 months for senior hires.
Employee resignation notice
Employees resigning from confirmed roles typically give 30 days notice under most state Shops Acts. Notice buy-out by either party is common and legally permissible throughout India.
How is severance pay calculated in India?
Retrenchment compensation applies to workmen after 1 year of continuous service. The rate is 15 days average wages for every completed year (or any part exceeding 6 months). Average wages are calculated over the last 3 months.
Gratuity applies to all employees after 5 years of continuous service. The rate is 15 days of last drawn basic salary plus dearness allowance, divided by 26 working days, for every year of service.
| Entitlement | Qualifying service | Formula | Who qualifies |
|---|---|---|---|
| Retrenchment compensation | 1 year | 15 days average wages per completed year | Workmen only |
| Gratuity | 5 years | 15 days basic+DA wages per year (divided by 26) | All employees |
Both obligations can arise on the same termination. An employee with 7 years' service who is classified as a workman could receive both retrenchment compensation and gratuity. Non-workmen receive only gratuity; any additional severance is contractual.
Gratuity tax treatment
Gratuity up to ₹2,000,000 is exempt from income tax for private sector employees under the Income Tax Act. This is a lifetime cumulative ceiling across all employers. Amounts above the ceiling are taxed as salary income. Gratuity must be paid within 30 days of it becoming payable.
The Re-skilling Fund (new since November 2025)
Under the Industrial Relations Code 2020 (effective 21 November 2025), employers must deposit 15 days wages of the retrenched worker into the Worker Re-skilling Fund within 45 days of retrenchment. This is a third cost on top of notice pay and retrenchment compensation, and it is new: it did not exist under the old Industrial Disputes Act 1947.
No statutory cap on countable years
Unlike the UK statutory redundancy formula, India's retrenchment compensation formula has no cap on the number of service years that can be counted. A long-tenured workman's entitlement grows with each year of service without a ceiling. This makes headcount planning and severance budgeting for long-service employees particularly important.
Government approval and large-establishment rules
Establishments with 300 or more workers need prior government permission before any retrenchment, lay-off, or closure. Apply at least 60 days before the proposed date.
If the government does not reply within the required period, permission is treated as granted. If permission is refused, the retrenchment cannot go ahead. Proceeding without permission is not valid under the law.
Establishments with 300 or more workers must apply for government permission at least 60 days before any proposed retrenchment, lay-off, or closure. Proceed without permission and the act is void. The threshold was raised from 100 workers under the old Industrial Disputes Act 1947 to 300 under the Industrial Relations Code 2020, effective 21 November 2025.
Source: PRS Legislative Research, Industrial Relations Code 2020
The threshold change from 100 to 300 workers is significant: many mid-size employers who previously needed government approval now fall below the threshold under the new Code. Check your current headcount against the new threshold, not the old one.
What happens at establishments below the threshold
Below 300 workers, the employer notifies the labour authority but does not need permission. Standard procedure applies: 30 days notice (or wages in lieu), retrenchment compensation at 15 days per year, LIFO selection, and Re-skilling Fund deposit within 45 days.
Closure rules
Permanent closure of an establishment follows the same government-approval requirement at the 300-worker threshold. Below the threshold, closure requires 60 days notice to employees and the labour authority. All employees made redundant on closure are entitled to retrenchment compensation regardless of service length, and gratuity where they meet the 5-year threshold.
Mutual separation and the full and final settlement
India has no formal mutual-termination route like France or Germany. Both parties can agree to end employment by mutual consent. The agreement must still cover all amounts the law requires. That means retrenchment compensation where it is owed, gratuity where the service threshold is met, and any accrued leave pay.
The full and final settlement (FnF) is the closing payment covering all amounts due at exit. Final wages must be paid within 2 days working days of the termination date (Code on Wages 2019).
The 2 days-day final pay rule is a material change from previous practice, which commonly ran to 30 to 45 days. Many employers are still adjusting payroll and HR systems to meet the new Code on Wages 2019 timeline (effective 21 November 2025). Failure to pay within 2 days working days can trigger a wages claim under the Code.
What the FnF typically includes
- Salary for days worked in the final month, at the daily rate
- Notice pay, if the employer waives the notice period
- Earned leave encashment, accrued but unused leave converted to cash
- Retrenchment compensation, where the employee is a workman with 1+ year of service
- Gratuity, where the employee has 5+ years of service (paid within 30 days separately)
- Performance bonuses due under the contract
Mutual separation agreements
Where a workman and employer agree to end the employment by mutual consent, Indian courts have generally held that a mutual separation agreement can preclude a later retrenchment claim, provided the agreement is genuinely voluntary, the employee received independent advice or had the terms explained, and statutory minimums (compensation and gratuity) were paid. A signed agreement without those elements is vulnerable to challenge.
Non-compete and garden leave
Non-compete clauses are narrowly enforced in India under Section 27 of the Indian Contract Act 1872: restrictions must be reasonable in scope and duration. Post-employment non-competes are generally void or very narrowly construed by Indian courts. Garden leave during a working notice period is permissible but rarely used at the workman level. No statutory limit on garden leave duration exists, but contractual enforceability depends on the duration and business justification.
How Teamed runs India terminations
Teamed becomes your legal employer of record in India for from $599 per employee per month, with zero FX mark-up in any currency. Workman classification, the Re-skilling Fund deposit, and the 2 days-day FnF deadline all run through Teamed's India ops.
We handle classification, notice, retrenchment compensation, gratuity, the Re-skilling Fund deposit, and the full and final settlement on one platform. The decision to terminate, the reason, and the terms of any enhanced payout remain yours.
Real HR and legal experts handle your India hires, from the first offer letter through every EPF and ESI filing. An actual person, not a chatbot or a pooled queue. There is no setup fee and no exit fee, and employer cost passes through at cost, itemised on every invoice.
The split of responsibilities under EOR for India terminations:
| What Teamed handles | What the client decides |
|---|---|
| Workman vs non-workman classification review | Whether to terminate, when, and why |
| Notice period calculation under the Industrial Relations Code 2020 | Performance standards and what constitutes breach |
| Government permission application for 300+ worker establishments | Whether to offer enhanced severance above statutory minimums |
| Retrenchment compensation calculation and payment | The commercial terms of any mutual separation agreement |
| Gratuity calculation, funding, and payment within 30 days | Communication with the wider team |
| Re-skilling Fund deposit within 45 days of retrenchment | Non-compete scope and enforceability appetite |
| Full and final settlement within 2 days working days per Code on Wages 2019 | Whether to contest or settle a labour court claim |
| EPF and ESI final settlement filings with EPFO | Severance policy for non-workmen above statutory minimums |
India's labour law framework changed materially on 21 November 2025 when the four Labour Codes took effect, consolidating over 29 central statutes. The Re-skilling Fund obligation, the 2-day FnF rule, and the revised 300-worker threshold for government approval are all new. Teamed's India ops track the implementation rules at central and state level so you don't have to.
EOR payroll, contractor onboarding, and entity setup all live on one platform. An India contractor who converts to payroll keeps their record, and that same employee can graduate from EOR to your own India entity without switching systems. Run the Crossover Calculator to see the month the model flips. EOR is the right model for a first India hire, until it isn't. Start from the India hiring overview; each guide here takes one layer of India employment law.
Key sources: PRS Legislative Research, Industrial Relations Code 2020 and India Briefing, Termination Guide.
Frequently asked questions
How much notice must you give to terminate an employee in India?
It depends on establishment size. For workmen in establishments with fewer than 300 workers: 30 days written notice, or wages in lieu. For workmen in establishments of 300 or more workers: 90 days notice plus prior government permission, applied for at least 60 days before the proposed date. Non-workmen are governed by their employment contracts and state Shops and Establishments Acts, typically 30 to 90 days.
Who qualifies for retrenchment compensation in India?
Workmen under the Industrial Relations Code 2020 who have completed 1 year of continuous service (at least 240 working days). The rate is 15 days average wages for every completed year of service, calculated on average wages for the last 3 months. There is no statutory cap on the number of countable service years.
What is gratuity in India and who is entitled to it?
Gratuity is a separate statutory payment under the Payment of Gratuity Act 1972, distinct from retrenchment compensation. Any employee, workman or non-workman, who has completed 5 years of continuous service is entitled to gratuity at 15 days of last drawn basic salary plus dearness allowance (divided by 26 working days) per year of service. Gratuity up to ₹2,000,000 is exempt from income tax.
When does government permission apply to retrenchment in India?
Prior government permission is required before retrenchment, lay-off, or closure in establishments averaging 300 or more workers. The employer must file an application at least 60 days before the proposed retrenchment date. Proceeding without permission makes the retrenchment void. The threshold was raised from 100 to 300 workers when the Industrial Relations Code 2020 took effect on 21 November 2025.
When must the full and final settlement be paid in India?
Under the Code on Wages 2019 (effective 21 November 2025), final wages must be paid within 2 days working days of the termination date. This covers salary for days worked, notice pay, and earned leave encashment. Gratuity must additionally be paid within 30 days of becoming payable. EPF settlement follows EPFO timelines.
What is the Re-skilling Fund and when does it apply?
The Worker Re-skilling Fund is a new obligation under the Industrial Relations Code 2020 (effective 21 November 2025). Employers must deposit 15 days wages of each retrenched workman into the Fund within 45 days of retrenchment. It is in addition to retrenchment compensation and gratuity, and applies to workmen in all covered establishments.
The 2-day final pay deadline under the Code on Wages 2019 is the change India employers haven't built into their payroll runs yet. Most FnF processes still assume two to four weeks. When the Code took effect in November 2025, that gap became a compliance liability overnight.
India gives you two severance bills on the same termination: retrenchment compensation after 1 year and gratuity after 5 years, both calculated at 15 days per year, both mandatory.
Then there is the Re-skilling Fund, the 2 days-day FnF deadline, and government approval if you are above the worker threshold.
The complexity is real. The cost of getting it wrong is higher.
