Calculation of Retrenchment Compensation under Indian Employment Laws

The definition of retrenchment as interpreted by Courts is wide. It is so wide that every termination, for any reason whatsoever, except those expressly excluded under Section 2(oo) of the Industrial Disputes Act, 1947 is considered a retrenchment.

There are provisions under Chapters V-A and V-B of Industrial Disputes Act relating to retrenchment under certain situations. Section 25F provides for conditions precedent to retrenchment of workers, Section 25F(b) provides for payment for retrenchment compensation which shall be equivalent to 15 day’s average pay for every completed year of continuous service or any part thereof in excess of 6 months.

As per employment law in India, the payment of retrenchment compensation is condition precedent and failure to pay will vitiate the retrenchment. Therefore calculation of retrenchment compensation is very important. While calculating retrenchment compensation unlike Gratuity component of wages includes Basic, Dearness Allowance and all allowances. Since, payment of retrenchment compensation is a condition precedent; one will have to consider definition of Wages as provided in Section 2(rr) in Industrial Disputes Act. –

while calculating retrenchment compensation, Basic Wages, Dearness Allowance, all allowances for attendance , House Rent , Conveyance  etc shall have to be considered. The value of housing provided as well as value of amenities provided along with housing also will have to be considered.

The period of 6 months or excess thereof will be considered a full year, if period of employment is less than 6 months, it will not be considered a full year. The following illustration will help explain the calculation of retrenchment compensation –

Mr ABC has worked in an organization for 24 years, 5 months and his last drawn package is as under –

Basic Wages – Rs 5, 000 + Dearness Allowance – Rs 3, 000 + Conveyance Allowance – Rs 1, 500 + Washing Allowance – Rs 1, 000 + House Rent Allowance – Rs 1, 000 + Canteen facility worth Rs 1, 000 + Dress Allowance – Rs 1, 000. The total amount to be considered for retrenchment compensation is Rs 13, 500.

13, 500

_______ = 519.23 (1 Day’ salary)

26 days

519.23 X 24 years X 15 days = Rs 1, 86, 922. 80/-

Therefore the amount of retrenchment compensation to be payable to Mr ABC is Rs 1, 86, 922. 80/-


  • Vijaykumar s satam

    Very nice.

  • udit

    What salary will the Average compensation be worked on?…. take for example your own example, Since Mr.ate Mr ABC worked for 24 years so, we have to work our separate 15 days average for every spective year ABC has worked or we have to work our retrenchement compensation on last drawn salary?

  • Welset Moulders

    Whether closure of Mfg activities amount to Retrechment?

  • I’m one sweet & namkin shop owner running business from my childhood. One of my employees is cook. He’s worked with us from January 2005. Now we’re paying ₹9500 per month. We are not satisfied with his work at all. So what are our liabilities as per prevailing labour laws? We are also paying his PF&Esi.

  • Manoj

    I am going through this retrenchment process in HCL chennai-2017
    My Take home salary is 60000/-.I am working in this company for 7 months.(Total experience 6.5 yrs)

    Now the compensation told my company is 1st month(June) -full salary,July & aug basic salary(28500)
    So it means (60000+28500+28500) .
    Is this acceptable??
    I am asking for 3 month full salary , so that i can sustain for some months without job.
    Also this is informed on May 25th 2017 and asking to resign with last date May 31st 2017.Within 6 days prior , they informed this .
    Pls help me out of this Hectic suituation

  • Kishore

    In calculation of retrenchment compensation can we take ,
    Salary = basic pay + Da{forming part of retirement benefits} +commission {% on turnover }
    ** % of turnover for commission in salary definition can we take or not
    Salary = basic pay + any DA
    Pls reply

  • Nirmal

    OK I was clear 13500/26 days one day salary.

  • Gopal sharma

    Taxable car facility are included or not in retrenchment compensation

  • Shisir Kumar Singh

    Dear Sir,
    1- My employer company has told me that I will be retrenched on the ground of surplus employee. I am working here since June-2014 and getting monthly take home salary as Rs. 36900/-. Would you please calculate my retrenchment amount?
    2- HR is forcing me to resign from my post. What would be beneficial for me Sir- Retrenchment or resignation…

  • Yatin Thakur

    In case of Retrenchment, gratuity Amt & compensation Amt will be same or Different?

  • K Vilas

    Is it still 15 days / year ? Or it is increased now ?

  • Rushikesh

    if period is less than 6 month then how to calculate it.

  • S. Arul Rajan

    Very Good Example for Explanation

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