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Notice, retrenchment pay, final settlement and gratuity under the Labour Codes, with a worked example and an exit checklist. Checked against the labour ministry’s employer handbook in November 2026.
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Ending employment in India is governed by the four Labour Codes, which the government made effective from 21 November 2025, replacing 29 older labour laws (PIB release). For exits, two matter most: the Industrial Relations Code, 2020 and the Code on Wages, 2019. The rules change with how the job ends and who the employee is, so a resignation, a dismissal for misconduct and a retrenchment each carry different notice, pay and paperwork.
This guide is for foreign companies with staff in India, and for the employer of record that employs them on their behalf. It covers notice, retrenchment compensation, the Worker Re-skilling Fund, the final settlement, gratuity and severance, with a worked example on a ₹60,000 monthly salary. Every rule links to the labour ministry’s Compliance Handbook for Employers Under the Four Labour Codes or to the Code itself on India Code. For the wider rulebook, start with our India employer compliance hub.
To end employment in India, give the notice the law or contract requires, pay all wages due within two working days, and pay gratuity within 30 days if the employee has five years' service. Retrenching a worker with a year's service also needs one month's notice and 15 days' average pay for each year served.
Employment in India usually ends in one of five ways: resignation, dismissal for misconduct, retrenchment, the end of a fixed-term contract or retirement. The Industrial Relations Code defines retrenchment as the employer ending a worker’s service for any reason other than disciplinary punishment, and it excludes voluntary retirement, superannuation, non-renewal of a contract, the end of a fixed-term tenure and termination for continued ill-health (Section 2, Industrial Relations Code).
That definition is why the label matters. A role cut because a project ended is a retrenchment, with notice and compensation attached. A dismissal after a proven breach of conduct rules is not.
| Type of exit | Who starts it | Notice | Retrenchment pay | Gratuity |
|---|---|---|---|---|
| Resignation | Employee | As set by the employment contract | No | Due after 5 years' service |
| Dismissal for misconduct | Employer, after a disciplinary process | As set by standing orders or the contract | No | Due after 5 years' service; check the Code before withholding any part |
| Retrenchment, for example a role made redundant | Employer | 1 month, or wages in lieu, for a worker with 1 year's service | 15 days' average pay per completed year | Due after 5 years' service |
| End of a fixed-term contract | Contract end date | None beyond the contract | No | Due after 1 year's service |
| Retirement at superannuation age | Retirement date | None | No | Due after 5 years' service |
A worker is anyone employed to do manual, unskilled, skilled, technical, operational, clerical or supervisory work for pay, apart from a few excluded groups. The definition on page 33 of the handbook leaves out people employed mainly in a managerial or administrative capacity, and supervisors earning more than ₹18,000 a month.
The test turns on the work, not the job title or the salary. An individual-contributor software engineer, a support executive or an accountant doing technical or clerical work can fall inside the definition at any salary. A team lead who mainly supervises and earns above ₹18,000, or a department head who manages, usually falls outside it.
It matters because retrenchment notice, retrenchment compensation and the Re-skilling Fund are written for workers. For staff outside the definition, the employment contract sets the notice period and any severance, and the Shops and Establishments Act of the state where they work can add conditions. Our Shops and Establishments guide explains which state law applies to an office.
Peorient is an EOR and PEO advisory focused on hiring in India. Tell us the role, location and situation, and we connect you with India specialists, Remunance first, that can run the exit and final settlement as the legal employer. Free for companies.
A worker with at least one year of continuous service must get one month’s written notice stating the reasons, or wages for the notice period in lieu, before retrenchment. That is the first condition in Section 70 of the Industrial Relations Code, which also requires the employer to notify the government or the authority it names.
Factories, mines and plantations with 300 or more workers must give three months’ notice and get prior permission (handbook, page 15). Office teams hired through an employer of record are rarely factories, mines or plantations, so the one-month rule is the one that usually applies.
Yes. The statutory month is a floor, and an offer letter can set a longer notice period for both sides. An employer can also pay salary for the notice period instead of asking the employee to work it out. Our notice period buyout guide shows how that payment is calculated and taxed, and notice period laws by country compares India with other markets.
Retrenchment compensation is 15 days’ average pay for every completed year of continuous service, and any part of a year over six months counts as a full year. The rate is set in Section 70 and repeated on page 14 of the handbook. On top of it, the employer pays 15 days’ wages for each retrenched worker into the Worker Re-skilling Fund.
Take a worker on ₹60,000 a month with 6 years and 3 months of continuous service, retrenched without working out the notice. Three months is under six, so six years count. On a 30-day month, 15 days’ pay is ₹30,000.
| Item | Calculation | Amount |
|---|---|---|
| Notice pay in lieu of one month | 1 × ₹60,000 | ₹60,000 |
| Retrenchment compensation | 6 years × ₹30,000 | ₹1,80,000 |
| Worker Re-skilling Fund, paid to the fund | 15 days' wages | ₹30,000 |
| Gratuity, 6 years' service | ₹60,000 × 15 ÷ 26 × 6 | ₹2,07,692 |
| Cost of the exit before final salary and leave encashment | Sum of the four lines | ₹4,77,692 |
Salary for the final month, leave encashment and any earned bonus are added in the full and final settlement. Our full and final settlement guide works through those lines, and the gratuity guide covers the formula, the ceiling and the tax exemption. To see what the same hire costs while employed, try the India hiring cost calculator.
Prior government permission is needed only in factories, mines and plantations with 300 or more workers. For them the handbook lists three months’ notice before retrenchment, and an application for permission at least 90 days before a closure, with a copy to the workers’ representatives (page 15).
Factories, mines and plantations with 50 to 299 workers do not need permission, but they must notify the government before a lay-off, retrenchment or closure and give at least 60 days’ notice of a closure (page 14). In both groups a laid-off worker is paid 50% of basic wages plus dearness allowance, and when ownership or management changes, workers with a year’s service are entitled to notice and retrenchment compensation.
Dismissal for proven misconduct is not retrenchment, so no retrenchment compensation is due, but the process must be fair and on paper. The Code’s definition of retrenchment excludes punishment by way of disciplinary action, which is why the record carries so much weight if the employee challenges the decision.
Standing orders apply to establishments with 300 or more workers (handbook, page 13), and where they apply, follow them. Smaller employers should set out conduct rules and disciplinary steps in the contract or an employee handbook. A defensible process has five parts: a written charge, the employee’s written reply, a hearing or enquiry, a reasoned decision and a dismissal letter. Fines can be deducted only after the employee has had a chance to be heard (page 9).
A woman cannot be dismissed or discharged for absence on maternity leave taken under the law (page 26; see our maternity leave guide). A worker can also take an individual grievance to the Grievance Redressal Committee within one year, and the committee has 30 days to finish (page 12).
All wages due must be paid within two working days of the employee’s last day, whether they resigned, were dismissed or were retrenched (handbook, page 8). Gratuity has its own deadline of 30 days from the date it becomes payable (page 26).
A complete settlement statement lists:
Hand over the relieving letter, an experience letter and the annual TDS certificate, and support the employee’s PF transfer or withdrawal. Our EPF and ESIC guide covers the contribution side.
India has no general severance requirement beyond retrenchment compensation for workers. Managers and senior staff outside the worker definition receive what their contract or a negotiated exit agreement gives them, on top of statutory dues such as gratuity and earned leave.
Some employers add extra months of pay to secure a smooth handover and a signed release of claims. Treat that as a commercial choice: write the amount into a separation agreement, state how it will be taxed, and pay statutory dues as separate lines so the agreement cannot be read as replacing them.
With an employer of record, the EOR is the legal employer, so it issues the notice, runs the final settlement and pays gratuity, while you decide whether the person leaves. The statutory cost is the same as if you employed them directly, and the EOR passes it through on its invoice.
Before you sign, ask any provider three questions: who drafts and signs the termination letter, how it meets the two-working-day wage deadline, and whether it charges an offboarding fee. Remunance, our first pick for India, employs teams on its own Indian entity and runs payroll and statutory filings there; read our Remunance review. Compare it with other providers in our Best EOR in India guide and the India EOR Price Index, or weigh an EOR against your own company in EOR vs subsidiary in India.
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Work through these nine steps in order, and keep a copy of every notice and calculation.
Only by paying wages in lieu of notice, or after a proper disciplinary process for misconduct. For a worker with a year's service, Section 70 of the Industrial Relations Code requires one month's written notice with reasons, or pay instead, and the employment contract can require more.
Not if they have less than one year of continuous service, because the notice and compensation conditions in Section 70 apply from one year. The notice in the probation clause still applies, and final wages are still due within two working days.
Any part of a year over six months counts as a full year. Service of 4 years and 8 months counts as 5 years, while 4 years and 5 months counts as 4.
No. The Code excludes termination at the end of a fixed-term tenure and the non-renewal of a contract. A fixed-term employee who has served at least one year is still due gratuity, according to page 26 of the labour ministry's employer handbook.
All wages due must be paid within two working days of the last day, whatever the reason for leaving. Gratuity is due within 30 days of becoming payable.
An employer must not dismiss or discharge a woman for absence on maternity leave taken under the law. Any exit during or around maternity leave needs an unrelated, documented reason and careful legal review.
It is 15 days' wages for each retrenched worker, paid by the employer into the fund in addition to retrenchment compensation. The labour ministry's handbook lists it on pages 14 and 15.
If you employ in India through an EOR, or plan to, we compare providers on fees, exit handling and settlement speed, and send you a shortlist in 2 to 3 business days. Get a free shortlist, or read the India employer compliance hub for the rest of the rules, including India’s labour laws and employer costs in India.
Written by
Lead India Employment and Payroll Specialist · 13+ years experience
Priya is Peorient's resident expert on hiring in India. Former senior HR Tax consultant at a Big 4 firm in Bengaluru and Head of Payroll Operations at a Pune-based EOR. Advocate enrolled with the Bar Council of Maharashtra and Goa. Has run state-level registrations in 14 Indian states.
