As per the prevalent norm, the employees are required to serve notice within the stipulated time before leaving the  organisation. The notice period, however, varies from organisation to organisation. For example, in an organisation the notice period may be 90 days or an employee has to pay 90 days salary amount to the organisation as an employee may get a better job opportunity in another organisation wherein he is required to join within 30 days. Accordingly the employee has to give 30 days notice in old organisation, and pay for short notice of 60days.

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Generally the contract of service also provides that in case the employer is not satisfied with the performance of the employee he may terminate his services by giving a notice of 30 days or 30 days salary. In case the employer suspends the employee with immediate effect he pays an amount equivalent to 30 days salary and claims deduction thereof. Such amount becomes taxable in the hands of the employee. However, in case the employee is required to pay notice period salary, no deduction of such amount paid is allowed to him. If the new employer agrees to bear the brunt of notice period pay, say of 60 days in above example, the said amount will be  included in the total income of the employee and tax will be deducted thereon even if such income belonged to the exemployer and is taxable in his hands. Thus, in effect the assessee will be liable to pay tax on 14 months salary i.e. salary for more than 12 months without any deduction available to him.

It is suggested that said anomaly may be resolved and appropriate provisions be inserted so that income from notice period pay is chargeable in the hands of ex-employer and deduction of the amount of notice period pay paid be made available to the employee as he has not effectively received that income.

Source- Pre-Budget Memorandum 2014 on direct taxes by Institute of Chartered Accountants of India

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2 responses to “Allow Deduction to salaried assesses of Payment for notice period – ICAI”

  1. Ash says:

    Could someone please tell me if this amendment has been incorporated.?

  2. Kushal says:

    You don’t make any sense. How the employee is liable to pay tax on an amount which he has not earned? The ex-employer who doesn’t show the income recovered from employee anywhere is at fault here. Also, the new company which offers the employee to join early is at the obligation to pay entire amount to full extent to employee. The entire amount is basically from one company to another. Employee should have nothing to do with it. The current rules should be amended.

  3. anil says:

    Dear
    I left my last company and paid a notice pay of 1.90 lacs. As the new company is not paying it how can I show it for IT refund . more over the previous company has also not mentioned any where in the form 16. pl guide

  4. Dhananjay Bhamare says:

    Logically the payment to buy a notice period should not be taxed in the hands of Assesee (employee). Currently under whose hand the payment is taxable?

  5. s sudarshana says:

    I personally feel the said rules are quite fair and should be continued. As the new employer pays extra 2 months salary to pay off the old employer by the employee, the tax burden invariably rests with the employee.
    Hencefoth the employee should insist the new employee to compensate to such an extent the employee is not put to loss.
    Alternatively the old employer should adjust the money so received (2 months salary in liew of the notic eperiod)as returning of the salary paid by him already preceddin the notice period. Thus Form 16 of the old and the new employer will have only 12 months salary of the employee. Point to ponder.!

  6. Manoj Gokhale says:

    allowing deduction of notice pay paid to previous employer must allowed as deduction, otherwise it is double taxation in the hands of employee or taxable of income which is not earned at all.

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