+ Re-skilling fund
Retrenchment Compensation Calculator: IR Code 2020 and Re-skilling Fund: This free retrenchment compensation calculator works out what a laid-off worker gets under the Industrial Relations Code, 2020:
- notice pay in lieu of one month's (or three months') notice;
- retrenchment compensation of 15 days' average pay for every year of service;
- gratuity, if you have 5 years of service;
- the new worker re-skilling fund credit of 15 days' wages;
- the tax-free part of the compensation.
It also covers closure and checks whether you count as a "worker" under the Code.
Retrenchment Compensation Formula
Example (calculator default): a worker retrenched on 31 October 2026 after 8 years 7 months, gross ₹50,000 and Basic + DA ₹20,000, in an establishment with fewer than 300 workers, with no notice given.
| Item | Working | Amount |
|---|---|---|
| Wages (50% rule) | Basic + DA ₹20,000 is below half of ₹50,000, so wages = ₹25,000 | ₹25,000 |
| Years counted | 8 years 7 months; more than 6 months counts as a year | 9 |
| Notice pay in lieu | One month's wages | ₹25,000 |
| Retrenchment compensation | 25,000 ÷ 26 × 15 × 9 | ₹1,29,808 |
| Gratuity | 25,000 ÷ 26 × 15 × 9 (5+ years) | ₹1,29,808 |
| Paid by employer | ₹2,84,616 | |
| Re-skilling fund credit | 25,000 ÷ 26 × 15, credited within 45 days | ₹14,423 |
The compensation is fully tax-free here because it is below ₹5 lakh and within the formula limit. Salary for days worked and leave encashment are extra; add them with the full and final settlement calculator.
Retrenchment Rules Under the IR Code, 2020
| Rule | What the law says |
|---|---|
| Who is covered | A "worker" with at least one year of continuous service (Section 70) |
| Notice | One month's written notice with reasons, or wages for the notice period |
| Compensation | 15 days' average pay for every completed year of continuous service, or part of a year over 6 months |
| Notice to government | Form XIII to the Central Government and the Deputy Chief Labour Commissioner (Central), within 3 days of serving notice or paying wages in lieu (Rule 27, IR (Central) Rules, 2026) |
| 300 or more workers | Three months' notice or pay in lieu, and prior permission of the government (Section 79) |
| Re-skilling fund | Employer pays 15 days' last drawn wages within 10 days; the worker is credited within 45 days (Section 83; Rule 37) |
The Industrial Relations Code came into force on 21 November 2025, replacing the Industrial Disputes Act, 1947. The Industrial Relations (Central) Rules, 2026 were notified on 8 May 2026 (G.S.R. 342(E)).
Who Is a "Worker"? (Check This First)
Retrenchment compensation and the re-skilling fund are only for "workers" under Section 2(zr) of the IR Code. The definition leaves out:
- people employed mainly in a managerial or administrative capacity;
- people in a supervisory capacity drawing wages above ₹18,000 a month (or a higher amount the Central Government notifies);
- members of the armed forces, police and prison staff.
Courts look at the main duties you actually perform, not your designation. If you are not a worker, notice and severance come from your appointment letter or company policy, and gratuity is still payable after 5 years.
Worker Re-skilling Fund: 15 Days' Wages
The re-skilling fund is new under the IR Code. For every retrenched worker, the employer must transfer an amount equal to 15 days of last drawn wages to the fund electronically within 10 days of retrenchment, and send the worker's name, amount and bank details to the Labour Commissioner (Central) office. That office credits the money to the worker's bank account within 45 days of retrenchment (Rule 37, IR (Central) Rules, 2026).
It is paid on top of retrenchment compensation and applies only to retrenchment, not closure. The rules do not fix a divisor for 15 days' wages; the calculator uses the same ÷ 26 or ÷ 30 choice as for compensation.
Average Pay, Wages and the 50% Rule
Average pay (Section 2(d), IR Code) is the average of wages for the last three complete calendar months for a monthly-paid worker, four complete weeks for a weekly-paid worker, and twelve full working days for a daily-paid worker.
Wages under the labour codes are Basic + DA + retaining allowance. If allowances such as HRA and special allowance are more than half of total pay, the excess is added back, so wages are never less than 50% of gross. In the example, Basic + DA of ₹20,000 on ₹50,000 gross becomes wages of ₹25,000.
Days in a month: 15 days' pay is usually worked out as monthly wages ÷ 26 × 15, the same method used for gratuity and in the income-tax exemption formula. Some employers use ÷ 30, which gives about 13% less.
Compensation on Closure
When an establishment closes, workers with at least one year of service get notice and compensation as if they were retrenched. If the closure is due to unavoidable circumstances beyond the employer's control, compensation is limited to 3 months' average pay. Financial difficulties, losses or accumulated stock do not count as such circumstances. The re-skilling fund applies only to retrenchment. Choose "Closure" or "Closure (unforeseen)" in the calculator.
Is Retrenchment Compensation Taxable?
Retrenchment compensation is tax-free up to the least of:
- the compensation actually received;
- the amount under the statutory formula: average wages ÷ 26 × 15 × years of service;
- ₹5,00,000.
Anything above that is taxable as salary. Compensation paid under a scheme approved by the Central Government is fully exempt. From tax year 2026-27 the exemption is in Section 19 of the Income-tax Act, 2025. Notice pay in lieu is taxable as salary, and gratuity is tax-free up to ₹20 lakh. Check TDS with the TDS on salary calculator.
Retrenchment vs Termination vs Lay-off
| Exit | What you get |
|---|---|
| Retrenchment | Notice or notice pay, 15 days' pay per year, re-skilling fund credit, gratuity after 5 years |
| Closure | Notice and compensation as if retrenched (capped at 3 months for unforeseen closure) |
| Resignation, retirement, end of fixed-term contract, dismissal for misconduct | Not retrenchment: no retrenchment compensation. Gratuity and final settlement as usual; see the notice period calculator |
| Lay-off (temporary) | Lay-off compensation for the days laid off, not retrenchment compensation |
How to Use This Retrenchment Calculator
- Choose retrenchment, closure, or closure due to unforeseen circumstances.
- Open Exit Details: enter your date of joining, date of retrenchment and any notice days given, then choose the size of the establishment and your role.
- Open Salary: enter your average monthly gross and Basic + DA, and choose ÷ 26 or ÷ 30.
- Read the notice pay, compensation, gratuity, re-skilling fund credit and the tax-free part. Use Copy to share it.
For gratuity rules in detail, see the gratuity calculator.
Frequently Asked Questions
How is retrenchment compensation calculated?
15 days' average pay for every completed year of continuous service, counting a part year over 6 months as a full year. On ₹25,000 wages and 9 years: 25,000 ÷ 26 × 15 × 9 = ₹1,29,808.
What is the worker re-skilling fund?
A fund under Section 83 of the IR Code. For each retrenched worker, the employer pays 15 days' last drawn wages within 10 days, and the worker is credited the amount within 45 days of retrenchment.
How much notice is required for retrenchment?
One month's written notice with reasons, or one month's wages in lieu. Establishments with 300 or more workers need three months' notice or pay in lieu and prior government permission.
Who is eligible for retrenchment compensation?
A "worker" under the IR Code with at least one year of continuous service. Managerial and administrative staff, and supervisors earning above ₹18,000 a month, are not workers.
Is retrenchment compensation the same as gratuity?
No. Both use 15 days' pay per year, but gratuity needs 5 years of service and is paid on any exit, while retrenchment compensation needs one year and is paid only on retrenchment or closure. A retrenched worker with 5 or more years gets both.
Is retrenchment compensation taxable?
It is tax-free up to the least of the amount received, the statutory formula amount and ₹5 lakh, under Section 19 of the Income-tax Act, 2025. The rest is taxable as salary.
Which wages are used for retrenchment compensation?
Average pay of the last three complete calendar months for monthly-paid workers, using wages under the labour codes: Basic + DA, but not less than 50% of total pay.
What do workers get when a company closes?
Notice and compensation as if retrenched. If the closure is due to unavoidable circumstances beyond the employer's control, compensation is limited to 3 months' average pay. The re-skilling fund applies only to retrenchment.
When must retrenchment dues be paid?
Notice pay and compensation at the time of retrenchment, and wages within 2 working days under Section 17(2) of the Code on Wages. The re-skilling fund credit comes within 45 days and gratuity within 30 days.
Do IT and corporate employees get retrenchment compensation?
Only if they are "workers" under the IR Code. Employees in technical or operational roles can qualify, while managers and supervisors earning above ₹18,000 a month do not. Courts look at actual duties, not job titles.