Notice Pay Recovery & GST Regulations (2026)
When an employee exits before completing the mandatory notice period specified in their employment contract, employers recover notice pay for unserved days during the Full & Final (F&F) settlement.
| Component | Formula & Treatment | GST Applicability |
|---|---|---|
| Daily Notice Rate | Monthly Gross Salary / 30 Days | Base Calculation |
| Unserved Notice Recovery | Daily Rate * Unserved Days | Attracts 18% GST |
| Earned Leave Adjustment | Earned Leaves * Daily Rate | Reduces Recovery Amount |
Calculating Notice Period Buyout & Recovery Deductions
- Unserved Notice Days Recovery: Per-day basic/gross salary deducted for unserved notice period days upon resignation.
- 18% GST Penalty Risk: Under recent tax advance rulings, notice recovery deductions made by employers can attract 18% GST if treated as service breach compensation.
New Employer Buyout Taxability
- Reimbursement Taxability: If your new employer reimburses your notice buyout amount, the reimbursed sum is added to your gross taxable salary income.
- Net Settlement Credit: Verify Full & Final (FnF) statement calculation against earned leave encashment and pending bonus credits.
Notice Buyout Negotiation Tip
Request your former employer to adjust unserved notice days against accrued EL/PL leaves to minimize cash recovery deductions and GST exposure.