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Tax query - interesting

CA. Deepak Narula (B.Com., ACA, DISA) (541 Points)

27 July 2011

Hi All

Suppose an employee in private sector leaves the job without serving the notice period and pays the amount to his employer in lieu of that. What will be the treatment of that amount paid? Is there any deduction available to employee? If yes, under which section and which head?

Thanks

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9 Replies

Mihir (Wealth Manager) (5293 Points)
Replied 27 July 2011

I don't know, but usually BPOs are following this practice that if an employee leaves without issuing one months notice, then the employee has to pay one months salary as penalty to the company.

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VIJAY KUMAR B (Articles) (37 Points)
Replied 27 July 2011

Hi deepak

As the employee has received his income and then paid back to the company it is just mere application of income and it is taxable in the hands of employee and no deduction is available.

Ashpak Ali (Finance Accounts Manager) (87 Points)
Replied 27 July 2011

IN THIS CASE EMPLOYEE CAN NOT TAKE ANY DEDUCTION IN HIS EXPENSE FOR PAY TO HIS EMPLOYER BECOZ NO ANY PROVISSION GIVEN IN THE INCOME TAX ACT

CA. Deepak Narula (B.Com., ACA, DISA) (541 Points)
Replied 28 July 2011

Hi Vijay

I am not convinced by the statement that it is an application of income. Because the employee has foregone it for not serving the notice period and has not got anything from the new employer as well.

If the same logic is applied in case of professional say CA, then he may not be allowed his office expenses incurred out of his professional receipts because it is mere application of income. In the same way, the employee who pays notice period pay is incurring it for his employment and not for his household purpose or any other purpose which can be treated as application of income.

I agree that there may not be any specific provision for the benefit of employees in these cases, but I am not convinced by the logic that it is mere application of income, Thanks anyways.

Snehal (Learning Tax) (129 Points)
Replied 28 July 2011

One month Salary is returned back to the employer, it means employee worked free of charge for One month.

So the salary returned would not be counted as Salary paid, even the employer will follow the same principle, otherwise it will be treated as His income - Why get confused so much.

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A CHENCHUMOHAN (CHARTERED ACCOUNTANT) (48 Points)
Replied 24 August 2011

There is a subtle difference:

It is NOTICE "PAY" that is paid to the EMPLOYER. as such, in the salary received from that employer, this amount of notice pay is deducted and net only taken for computation of Income. LOGIC -> Income under the head Salary is 1)Received and/or 2) Receivable. Hence received salary gets reduced by returned salary. Moreover, If he gives notice and completes service for that period he has to receive salary. There is nothing called like FREE SERVICE.

BUT, if the amount is paid as "DAMAGES", etc. then he can not get the above benefit.

U S Sharma (glidor@gmail.com) (21056 Points)
Replied 24 August 2011

1st of all we have to understand the meaning of notice pay .......

notice is to be given 1 calander month in advance by either side employer and employee before terminating the service. so if anybody breaks the contract i.e if employer removes the employee, he will pay 1 month extra salary to employee as penalty, similer way the employee if leaves without notice, he will pay one month salary to employer as penalty.

regarding tax treatments, employee can not avail any incometax benefits for such notice pay , paid as penalty. TDS and all statuary deductions are applicable on such notice pay.