Salary & Income · Section 12(6) · Tax Year 2026-2027
Golden Handshake Tax Calculator
A severance lump sum is salary in the year you receive it, so it can land in the top slab. Section 12(6) lets you elect the average rate of your last three tax years instead — see which is cheaper.
The average rate
How your three years combine
| Year back | Taxable income | Tax charged | Rate that year |
|---|
The elected rate is total tax ÷ total income across the three years, so a high-income year weighs more heavily than a low one. It is not the plain average of the three yearly percentages.
Step by step
How the relief is worked out
Price the default
Tax on this year's salary plus the lump sum, less tax on the salary alone. That difference is what the severance costs at current slabs.
Work out the average rate
Total tax charged over the three preceding tax years, divided by total taxable income over those years.
Apply it to the lump sum
The severance is charged at that single rate, rather than climbing this year's slabs.
Elect only if it is cheaper
After a high-earning three years, the election can cost more than the slabs. Compare first, then give notice in writing.
Reading the result
Why a severance payment is taxed so heavily
A lump sum on leaving is salary in the year you receive it. Added to the months you already worked, it commonly lands in the top band in its entirety, so the marginal rate applied to it is the highest one you will face.
Section 12(6) exists precisely because that outcome overstates your real position: the payment compensates years of service, but the slabs see one year's income.
The average-rate election, and when it helps
The election taxes the payment at the average rate of the preceding three years instead. That works well for someone whose income was steady and who is now facing an exceptional year. It works less well for someone whose earlier years were also high, and it can be neutral or worse if your income has been rising fast.
It is a choice, made in the return, not something the employer applies when calculating the payment.
Not everything in the settlement is the same thing
A final settlement often bundles severance, gratuity, provident fund, leave encashment and notice pay into one transfer. They are not all taxed alike, and some have their own treatment. Ask for the payment to be broken down by component before you plan around a single figure.
The gratuity and provident fund calculator covers those components.
Where this stops
This compares the two treatments from the figures you enter. The three-year average depends on your actual assessed income in those years, which comes from the returns, not from memory.
FAQs
Golden handshake FAQs
What is a golden handshake in tax terms?
Any amount received from an employer as compensation for the loss of employment — a severance package, a negotiated exit payment, redundancy compensation, or a payment under a voluntary separation scheme. It is treated as salary income and taxed in the year you receive it, which is why a single large payment can be taxed far more heavily than the same money spread across working years.
What does the Section 12(6) election do?
It lets the employee elect, by notice in writing, to have the compensation taxed at the average rate of tax applied to their income for the three preceding tax years, instead of at this year's slab rates. Where those three years were taxed lightly, the saving can be substantial — a lump sum that would otherwise sit in the top slab is charged at a modest average instead.
How is the average rate worked out?
Total tax paid over the three preceding tax years divided by total taxable income over the same three years. It is an average of rates actually borne, not a slab rate and not an average of the three separate percentages weighted equally — a year with more income pulls the average more, which is what the totals-over-totals method reflects.
Where do I find the three years' figures?
From your filed returns or assessment orders for those years: taxable income and the tax charged on it. Use the figures as assessed, not estimates — the election is checked against your filing history.
Is a gratuity or provident fund payout the same thing?
No. Gratuity, provident fund and pension payments have their own treatment and their own exemptions, and are not compensation for loss of employment. Do not fold them into the amount here — work those out separately.
Is the election always better?
No. If the three preceding years were taxed at a higher average rate than the marginal rate the lump sum attracts now — for example after a period out of work, or a move to a much lower salary — the election costs more. Both outcomes are priced above for that reason.
Will my employer apply this automatically?
No. The employer normally deducts on the payment as ordinary salary. The election is the employee's, made in writing for the tax year of receipt, so raise it before filing rather than after.
Related tools
Gratuity or provident fund in the same package?
Those are taxed under their own rules and exemptions, not as compensation for loss of employment.
Open Gratuity & Provident Fund Calculator