Employee Termination in India: Legal Process, Notice & Severance

India has no "at-will" employment concept. Every termination must follow a legally prescribed process, and the specific requirements depend on the employee's classification (worker vs. non-worker under the Industrial Relations Code, 2020), the governing state law, and the reason for termination. Getting it wrong exposes your company to reinstatement orders, back-wage liability, and fines that, for establishments covered by Chapter X of the Industrial Relations Code, 2020, run to INR 1-10 lakh for a first contravention and INR 5-20 lakh, with up to six months' imprisonment, for a repeat one (section 86(1) and (2) of the Industrial Relations Code).

Why Termination Is Different in India

This article is part of our Complete Guide to Hiring Employees in India as a Foreign Company. For foreign companies operating through an Indian subsidiary, branch office, or using an Employer of Record, understanding these rules is not optional — it is a prerequisite for operating legally in India.

Legal Framework Governing Termination

Central Legislation

Since 21 November 2025 the central law on termination sits in the four Labour Codes, which the Ministry of Labour and Employment brought into force with effect from that date. A great deal of the operational detail still depends on central and state rules, so confirm the position in your state before acting on any of it. Three sources of law matter:

• Industrial Relations Code, 2020 (IR Code): replaced the Industrial Disputes Act, 1947. It governs termination of "workers" — the definition covers manual, unskilled, skilled, technical, operational, clerical and supervisory work, but excludes employees in a managerial or administrative capacity and supervisors drawing wages above the threshold set in that definition. It requires notice, retrenchment compensation and, in larger establishments, prior government permission
• Code on Social Security, 2020: replaced the Payment of Gratuity Act, 1972, along with the Payment of Bonus Act, 1965, the Maternity Benefit Act, 1961 and the provident fund and ESI statutes. Section 53 carries the gratuity entitlement — payable after five years of continuous service, and pro rata to fixed-term employees
• Shops and Establishments Act: State-level legislation governing working conditions and termination for employees in shops, commercial establishments, and offices — which covers most white-collar workers at foreign-owned companies

The Industrial Relations Code, 2020

The Industrial Relations Code (IRC), 2020 is one of four consolidated Labour Codes which consolidate 29 existing labour laws. The Centre brought the Codes into force with effect from 21 November 2025 by notifications of the Ministry of Labour and Employment issued that day, with several provisions awaiting full rule-level operationalisation through central and state rules. Key changes relevant to termination include:

• The threshold for mandatory government permission before retrenchment, lay-off or closure is 300 workers (section 77 of the IR Code), against the 100-worker threshold in Chapter VB of the repealed Industrial Disputes Act, 1947
• A worker re-skilling fund takes an employer contribution equal to 15 days' wages last drawn by the retrenched worker, credited to that worker's account within 45 days of the retrenchment (section 83 of the IR Code)
• Fixed-term employees receive gratuity on a pro rata basis even if they serve less than five years — this comes from section 53 of the Code on Social Security, 2020 rather than from the IR Code
• Penalties run on two tiers under section 86 of the IR Code. Contravening the Chapter X provisions on lay-off, retrenchment and closure (sections 78 to 80, which bite on establishments with 300 or more workers) carries a fine of INR 1-10 lakh, rising to INR 5-20 lakh and/or up to six months' imprisonment for a repeat offence. Contravening the general provisions (sections 67, 70, 73 and 75) carries a fine of INR 50,000 to INR 2 lakh, rising to INR 1-5 lakh and/or up to six months' imprisonment on repetition

Types of Termination

Voluntary Resignation

When an employee resigns voluntarily, the process is relatively straightforward. The employee serves the notice period specified in their employment contract (typically 30-90 days for managerial roles), completes a handover, and the employer processes full and final settlement including any earned leave encashment, bonus, and gratuity (if eligible).

Termination for Misconduct

Termination for cause — such as theft, fraud, habitual absenteeism, insubordination, or violation of company policy — requires a formal domestic inquiry process:

1. Charge sheet: Issue a written charge sheet detailing the specific misconduct allegations with supporting evidence
2. Employee response: Give the employee a reasonable opportunity (typically 7-15 days) to submit a written explanation
3. Domestic inquiry: If the explanation is unsatisfactory, constitute a domestic inquiry with an impartial inquiry officer. The employee has the right to present evidence and cross-examine witnesses
4. Inquiry findings: The inquiry officer submits findings to the management
5. Termination order: If misconduct is proven, issue a termination order citing the inquiry findings. The order must be proportionate to the offence

Skipping any step of this process — even for clear-cut misconduct — can result in a labour court declaring the termination "illegal" and ordering reinstatement with full back wages.

Retrenchment (Redundancy)

Retrenchment refers to termination for economic reasons — business downturn, restructuring, automation, or closure of a division. Under section 70 of the IR Code, retrenching a worker who has been in continuous service for at least one year requires:

• One month's written notice setting out the reasons for the retrenchment, or wages in lieu of that notice
• Retrenchment compensation: 15 days' average pay for every completed year of continuous service
• Notice to the appropriate Government in the prescribed manner
• LIFO principle: Last In, First Out — section 71 requires the employer to retrench the worker last employed in the category, unless it records reasons for departing from that order
• Re-employment obligation: under section 72, retrenched workers must be given an opportunity to apply before the employer hires others for the same role
• Prior government permission: in establishments with 300 or more workers Chapter X applies, and section 79 requires three months' notice and the prior permission of the appropriate Government before any retrenchment

Termination During Probation

Employees on probation can generally be terminated with shorter notice (typically 7-30 days depending on the contract) and without following the full domestic inquiry process. However, probationary termination must not be arbitrary — some Indian courts have held that even probationers deserve basic procedural fairness, especially if they allege discrimination.

Notice Period Requirements by State

For employees outside the IR Code definition of "worker" — managers, executives and most senior professionals — notice comes from two places: the employment contract, and the state Shops and Establishment Act that applies to the workplace. There is no single national figure, and the state position has been moving. The older state Acts (Delhi 1954, Tamil Nadu 1947, Karnataka 1961, Telangana 1988 and others) each carry their own minimum notice for employees who have completed a qualifying period of service. Several states have since replaced their Bombay-era Act with a new one drafted around ease of compliance — Maharashtra in 2017, Gujarat in 2019 — and those newer Acts are not written the same way, so the answer has to be read off the Act currently in force in the state rather than off a general rule.

Read the applicable state Act, and any exemption notification under it, before fixing a notice period in a contract. Most employment contracts for managerial roles specify 60-90 days' notice, which is enforceable provided it is not below any statutory minimum in that state. Payment in lieu of notice is accepted practice throughout India — the employer can pay the employee their salary for the notice period and ask them to leave immediately.

Severance Pay and Statutory Dues

Retrenchment Compensation

For a retrenched worker with at least one year of continuous service, section 70(b) of the IR Code sets the compensation at:

Retrenchment compensation = 15 days' average pay x completed years of continuous service

"Average pay" for a monthly-paid worker is the average of the wages over the three complete months preceding the retrenchment. The Code does not prescribe the divisor for turning a monthly wage into a daily rate for this calculation — employers commonly use 26, the divisor the Code on Social Security prescribes for gratuity — so settle the basis with counsel before you compute a figure, because the choice moves the number materially.

Gratuity

Gratuity under section 53 of the Code on Social Security, 2020 (which replaced the Payment of Gratuity Act, 1972) is payable to any employee who has completed five or more years of continuous service, regardless of the reason for separation — and the five-year condition does not apply where the employment ends on death or disablement. Fixed-term employees are paid pro rata. For a monthly-rated employee the rate is 15 days' wages for every completed year of service, taking the monthly wage divided by 26:

Gratuity = (Last drawn wages x 15 / 26) x Years of service

Example: an employee whose last drawn wages are INR 50,000 a month, with 8 years of service, receives (50,000 / 26) x 15 x 8 = INR 2,30,769.

Here "wages" means basic pay plus dearness allowance. Under the Code on Wages, 2019 the excluded allowances cannot exceed half of all remuneration — where they do, the excess is added back into wages, which raises the gratuity base for salaries structured with a small basic and large allowances.

Maximum cap: section 53 caps gratuity at the amount notified by the Central Government. That ceiling is INR 20 lakh under the limit carried forward from the Payment of Gratuity Act, 1972 — confirm the notified figure before settling a payment. Gratuity is exempt from income tax up to the amount calculated under the Payment of Gratuity Act for employees covered by that Act, and up to the amount notified by the Central Government for everyone else.

Timeline: the employer must determine the amount and pay it within 30 days of it becoming payable. Delayed payment carries simple interest at the rate notified by the Central Government.

Worker Re-skilling Fund (Under the Industrial Relations Code)

Section 83 of the Industrial Relations Code, 2020 requires an employer retrenching a worker to contribute an amount equal to 15 days' wages last drawn by that worker to the worker re-skilling fund, and the fund is used by crediting that amount to the retrenched worker's account within 45 days of the retrenchment. This is in addition to retrenchment compensation.

Full and Final Settlement Components

Every terminated employee is entitled to a full and final settlement that includes:

• Salary for days worked in the last month
• Earned leave encashment (unused paid leave)
• Retrenchment compensation (if applicable)
• Gratuity (if 5+ years completed)
• Statutory bonus under Chapter VII of the Code on Social Security, 2020, which replaced the Payment of Bonus Act, 1965, for employees whose wages do not exceed the ceiling notified by the appropriate Government
• ESI and Provident Fund contributions up to the last working day
• Any contractual severance (ex-gratia) agreed upon

Wrongful Termination Risks

Indian labour courts are generally employee-friendly. Common scenarios that lead to wrongful termination findings:

Procedural Failures

• Terminating for misconduct without conducting a proper domestic inquiry
• Issuing a charge sheet that is vague or does not specify the exact allegations
• Not giving the employee adequate time to respond (less than 7 days)
• Having a biased inquiry officer (e.g., the employee's direct manager who filed the complaint)

Discriminatory Termination

• Terminating a woman during pregnancy or maternity leave (prohibited under Chapter VI of the Code on Social Security, 2020, which replaced the Maternity Benefit Act, 1961)
• Terminating an employee for filing a complaint under the POSH Act (Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013) — this is treated as retaliation
• Terminating employees based on caste, religion, or disability — violates the Constitution and specific anti-discrimination statutes

Constructive Dismissal

Indian courts increasingly recognise constructive dismissal — where the employer makes working conditions so intolerable that the employee is forced to resign. Unilateral changes to job role, significant salary reduction, forced relocation without contractual basis, or public humiliation can all constitute constructive dismissal.

Best Practices for Foreign Employers

Based on Indian employment law and common compliance failures by foreign companies, here are the essential practices:

• Draft robust employment contracts: Include clear termination clauses, notice periods (matching or exceeding statutory minimums), and grounds for termination for cause. Have contracts reviewed by an Indian employment lawyer — template contracts from your home jurisdiction will not comply with Indian law. See our guide on employment contracts for foreign employers
• Maintain documentation: Document every performance issue, warning, and conversation. Indian courts expect a paper trail showing progressive discipline before termination
• Follow the domestic inquiry process: Even if you are confident the misconduct occurred, follow every step. The process is the protection — skip it and you lose in court regardless of the merits
• Offer a negotiated exit: In practice, many Indian terminations are resolved through mutual separation agreements with an ex-gratia payment (typically 2-6 months' salary depending on seniority and risk). This avoids litigation and provides certainty for both parties
• Complete full and final settlement promptly: Process all statutory dues within 30 days of the last working day. Delayed settlement is the most common trigger for labour complaints from departing employees
• Consult local counsel: Employment law varies dramatically by state. What works in Mumbai may not work in Bangalore. Always get state-specific advice through your compliance team

Key Takeaways

• India has no at-will employment — every termination requires legal grounds, proper notice, and a documented process
• Termination for misconduct requires a formal domestic inquiry with charge sheet, employee response, impartial hearing, and proportionate action — skipping any step risks reinstatement with full back wages
• Retrenchment compensation is 15 days' average pay per completed year of service; gratuity (five years or more) uses the same 15-days-a-year rate, capped at the ceiling notified by the Central Government — INR 20 lakh under the limit carried forward from the Payment of Gratuity Act, 1972
• Notice for workers is one month under section 70 of the IR Code, and three months plus government permission in establishments with 300 or more workers; for managerial staff it comes from the contract and the applicable state Shops and Establishment Act, with contracts commonly running to 60-90 days. Payment in lieu of notice is accepted practice
• The Industrial Relations Code, in force since 21 November 2025, sets the government-permission threshold for retrenchment at 300 workers and requires a re-skilling fund contribution of 15 days' wages per retrenched worker
• When in doubt, negotiate a mutual separation agreement — it is faster, cheaper, and less risky than contested termination in Indian labour courts