Tds on short notice pay

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sreenivas (Querist)
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03 February 2014 An employee gets an offer in a company(New Company). He has to give two months notice period in his existing company(Old company), if he fails to give sufficient notice he will have to pay two month`s salary. The New company promised him to pay the the notice period amount and take the employee. While making that payment the New Company deducts TDS, as it says it is salary.

If an employee spends some amount on behalf of company it can be reimbursed without TDS. This happens in case of mobile bills, hotel bills, air tickets etc. How is short notice period payment different from the others? Why should TDS be deducted on that?

AVTAR SINGH

AVTAR SINGH (Expert)
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03 February 2014 This amount is not given to perform his duties as an employee. The reimbursement of expenses like mobile bills, travel tickets are made him as he has to incur those expenses while performing his duties as an employee.

sreenivas

sreenivas (Querist)
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03 February 2014 Thanks for yoru reply. I dont think income tax act make any difference that way. Is the short notice pay liable to TDS?

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AVTAR SINGH

AVTAR SINGH (Expert)
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03 February 2014 TDS is applicable as the amount paid by the company is not exempt in his hands. Any amount which is not exempt is liable to TDS.

sreenivas

sreenivas (Querist)
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03 February 2014 Cant I say that the notice period pay is also reimbursement and not deduct TDS?

AVTAR SINGH

AVTAR SINGH (Expert)
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03 February 2014 These are not Reimbursement of expenses, because it was not a liability of company to pay 2 months salary. Even if some payments are made by employee to third party on which TDS is required to be deducted like audit fee exceeding 30000 then the company has to deduct TDS.

sreenivas

sreenivas (Querist)
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04 February 2014 The company has specifically asked the employee to quit the old Company and join the New company, even if any payment needs to be made. It has agreed to pay the employee the amount he pays to the old company. There is an oral contract created here. Can this be enough to say that the Company is liable to pay this amount?

In CIT v. Raghunath Murti [2009] 178 Taxman 144 (Delhi), the assessee-managing director revised return because he had to refund certain sum to his employer-company as the same was found in excess of limits prescribed in the Companies Act, 1956. The Delhi High Court held that as the said refund was neither voluntary nor was it for any extraneous consideration, the same could not be held to be the assessee’s income and, therefore, was not assessable. The above text is provided from the views of Dr. Vinod K. Singhania

I am trying to save tax to one of my friend who is a poor guy and got recruited to MNC. He is just making money. I dont want him to loose when he can actually save it, within the parameters of law.