💼 Notice Period & Salary Inputs
Buyout Settlement Breakdown
Gross Buyout Amount—
Earned Leave Adjustment Credit—
Net Payable to Former Employer—
Tax Payable on Reimbursement—
New Employer Reimbursement
—
Notice Period Buyout & Taxation Guide
The Double Taxation Trap
Income Tax law does NOT allow you to deduct the notice pay you paid to your old employer. Meanwhile, your new employer's reimbursement is 100% taxable as salary!
Earned Leave (PL) Encashment Credit
Adjusting accrued leaves against notice shortfall reduces the gross cash amount you must pay out-of-pocket during Full & Final (F&F) settlement.
💡 Pro Hack: Ask New HR for Gross-Up
Ask your new employer to "gross up" the buyout reimbursement amount by adding 30% to cover your tax TDS liability!
⚡ Direct Corporate B2B Payment
If your new employer transfers buyout funds directly to the former employer's bank account, some tax experts argue it falls outside personal income tax.
🛡️ Relieving Letter Essential
Always obtain the official F&F statement and Relieving Letter from your old company to pass new company background checks (BGV).
⚠️ 3 Common Notice Buyout Mistakes
- • Assuming Buyout Reimbursement is Tax-Free: It appears on Form 16 under 'Perquisites / Allowances' and is fully taxed at your slab rate.
- • Calculating Shortfall on CTC: Notice pay is calculated on Basic Salary (or Gross), never on total Cost to Company (CTC)!
- • Absconding Without Settlement: Absconding results in negative BGV marking on Form 26AS/PF portal, damaging future employment.
Notice Period Buyout: Income Tax & GST Treatment Matrix
| Buyout Transaction Type | Taxability under Income Tax Act | Deductibility for Resigning Employee | Applicability of GST |
|---|---|---|---|
| Employee Pays Employer (Shortfall Recovery) | Tax paid on full salary; IT Act provides NO deduction for recovered notice pay | Disallowed (Unless employer reduces Form 16 gross pay) | Clarified as 0% GST (CBIC Circular No. 178/10/2022) |
| New Employer Reimburses Buyout | Treated as "Profits in lieu of salary" under Sec 17(3) | Fully taxable at individual slab rate in new job | Exempt from GST (Employer-Employee relationship) |
| Employer Waives Notice Period | No recovery made; only actual working days paid | Clean tax record; no tax leakage | Nil |
Frequently Asked Questions
What is Notice Period Buyout Pay?
Notice Period Buyout occurs when an employee leaves a company without serving the full mandatory notice period (e.g. 90 days). The employee pays basic salary for the unserved days, or the new employer reimburses this cost.
Is notice period buyout recovery tax-deductible for the employee?
Unfortunately, under current Indian Income Tax laws, notice pay deducted or paid by an employee to the old employer cannot be claimed as a deduction from gross salary.
Is notice period buyout reimbursement from the NEW employer taxable?
YES. Any notice period buyout amount paid by the new employer to you (or paid directly to your old employer on your behalf) is treated as a perquisite/prerequisite under 'Profits in lieu of Salary' and is 100% taxable as per your income tax slab!
How is Notice Pay Shortfall calculated?
Notice Pay Shortfall = (Monthly Basic Salary / 30) × Unserved Notice Period Days. (Some companies calculate based on Gross Salary instead of Basic Salary as per HR policy).
What is GST on Notice Period Buyout in India?
Per recent CBIC clarifications, notice pay recovered by an employer from a departing employee is NOT subject to 18% GST.
Can notice pay shortfall be adjusted against earned leaves (PL/EL)?
Yes, HR policies usually allow employees to adjust unavailed Privilege Leaves (PL) against the notice period shortfall to reduce out-of-pocket buyout expenses.
What happens if an employee leaves without paying notice buyout?
The former employer will withhold the Relieving Letter, Experience Certificate, and full & final (F&F) settlement, making background verification (BGV) at the new company fail.
How can I structure new employer buyout to minimize tax?
Ask your new employer to issue the notice buyout payment directly to the former employer as an institutional corporate transfer, or gross up the reimbursement amount to cover tax TDS.