There is no need to pay income tax on notice period pay cut
Most salaried taxpayers change their jobs in the hope of better future prospects. The main motive behind any change in job is a more lofty pay package. But when an employee joins or leaves a company, he is bound by the some terms of employment and in most cases; an employee is required to serve the notice period before he can leave the company.
Most of the time employment agreements have a clause that if an employee wishes to leave the company before serving the stipulated notice period, he will have to pay the equivalent amount to the people who aren’t served notice period. This notice pay can be recovered from the payable salary of such employee. Chetan Chandak, Head of Tax Research, H&R Block India, says, “Under the tax laws, any payment received from the past, present or future employer is taxable as salary and it is taxable on due basis. Therefore, the regular salary received by an employee gets taxed on due basis (when it is paid every month). On the other hand, the recovery of the notice period happens only after the employee leaves the job. By that time the entire salary is already taxed by the employer on due basis.”
Tax laws provide for two types of deductions from salary –
“Other than this, it does not provide any specific deduction for the notice pay recovered. This was posing a lot of challenges to job hoppers who were getting taxed on this component of notice pay which was actually not received by them,” adds Chandak.
A similar situation came for adjudication in the case of Shri Nandinho Rebello vs. DCIT, in front of ITAT Ahmadabad. The assessee served with Reliance Communication for some period and Rs 1, 10,550 was recovered as notice pay from the total salary of Rs 1, 64,636. Therefore, after deducting the notice pay of Rs 1, 10,550, the assessee declared salary income of Rs 54,086. Later on, he joined Sistema Shyam Teleservices Ltd and received total salary of Rs 13, 95,880, out of which only Rs1, 66,194 was deducted as notice pay on leaving the company during the same year without serving the notice period. Therefore, the assessee laid claim to a total of Rs 2, 76,744 deductions for the notice pay recovered from his salary by his previous employers. But, according to both the assessing officer and CIT(A), no such deduction is available under Section 16 of the Act and the income salary is taxable on paid basis or on due basis.
After contemplating the facts as stated above, ITAT observed this to be a case of recovery of the salary already made to the assessee and there is no requirement to refer to Section 16 of the Act and actually, the assessee has received the salary from his previous employers only after deduction of the notice pay. Therefore, ITAT held that only the actual salary received by the assessee is taxable.
“In this case the ITAT Ahmedabad laid down an important principal that the assessee has actually received the salary from his previous employers only after deducting the notice pay (as per the job agreement with them) and therefore only the actual salary received (net of notice pay) by the assessee will be taxable.” states Chandak.
This will be a relief to a lot of job hoppers who switch their jobs for better economic prospects. But in a contrary order by ITAT Chennai in the case of S.S.N.Ravi vs. ACIT Cir III Chennai, the ITAT held that the Joining Bonus recovered from an employee on leaving the job before the stipulated time period will be taxable on due basis and there is no certain provision under the IT Act to claim recovery for such deduction.
