The Covid-19 crisis has slowed down economies, crushed businesses, and raised unemployment. The question is how prepared you are financially if you were to suddenly lose your job. Now, depending on your employer’s policies, you may be given a severance package that many companies offer to retrenched employees. Let’s discuss a few critical things about a severance package that you’re likely to find useful if you’ve been laid off unfortunately or are expecting a termination notice in the near future owing to the ongoing crisis.
What is a severance package?
When severing their ties with an employee, companies may offer a financial package in the form of a payment and other benefits so that the impacted employee can manage their needs for the immediate future in the absence of a job. The severance package could be a one-time payment or a multiple of the employee’s latest salary, or the continuance of the employee’s salary for an agreed upon number of months, depending on the company’s policy. A severance package could either be ascertained by the number of years the employee has worked in the company or implemented through a uniform system. A longer work association could also result in a greater severance package and vice-versa. Companies usually mention the severance clause in their agreement with the employee. Details pertaining to the applicable notice period and the steps for computation of the severance package are generally mentioned in the contract paper or the offer letter.
Should you opt for a lump-sum or a monthly severance package?
The terms of the severance pay are typically decided by the company. However, some companies do give an option to their employees about whether they want to receive the severance package in a lump-sum or through monthly payouts during the predefined tenure. The question arises that if you get such an option, what should you select? You should select the severance package option based on factors like your minimum mandatory monthly expenses, the total size of the severance package under both the options, and the applicable deadline.
For example, if the amount of the lump-sum payout is lesser than the combined value of your monthly payouts, you may choose the monthly package. However, if the monthly package is given only till the time you get a new job, choosing an upfront lump-sum option might be more beneficial. The point being, get complete clarity on how exactly the severance package will be handed out by your employer before making the decision.
What’s the tax liability on severance packages?
The severance package received from a company is usually taxed as a salary income. However, if the Industrial Dispute Act, 1947, applies to severance, then tax-exemption of up to Rs. 5 lakh is allowed to the employee. In case of severance due to voluntary retirement, the severance package of up to Rs. 5 lakh is tax-exempt, provided the employer should be an entity of a state or a central authority or any other eligible authority recognised by the Income Tax department. Severance package over and above Rs. 5 lakh is taxable at the applicable rate.
A few other important things to keep in mind
A severance package may not be sufficient for you to lead a normal life for several months in the absence of regular income. So, you must start an aggressive hunt for a new job from the get-go. This involves updating your resume, applying on relevant job portals, reconnecting with contacts who can help you get a job, reaching out to relevant hirers, upskilling if required, so on and so forth. You may also consider a part-time job, explore freelance opportunities, or look for ways to monetise your skills and hobbies until you get a permanent job. Even a small income can provide you significant relief, and, more importantly, lessen the psychological stress of suddenly losing your job.
Also, try to lower discretionary expenses during a financial crunch. The best option is to prioritise your expenses. If you fail to find a job during the severance package duration, you may need to take bigger steps to avoid financial distress, like shifting to a smaller rented home or moving in with your parents and pausing your investments temporarily. Avoid adding new debt when you don’t have a regular source of income, as it may lead you to a debt trap.
Finally, if you find it difficult to get a job despite all your efforts, you may want to reduce your salary expectation as a last resort. The overall situation may not be the same after this unparalleled coronavirus-fuelled crisis, so you must stay prepared for a worse financial crisis. But try not to feel overly depressed about it, keep calm, and look for other ways to boost your income. I wish you all the best.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.