Query On Short Notice Deducted In Full And Final

Dear All
If an employee resigns from the company & the Full & Final is prepared as follows:
Payments
Salary 30000
Leave Ench 20000
Deductions
Short Notice 40000
Balance to pay Rs.10,000/-
We consider Rs.50,000/- as income in Income Tax Return but what about the Short Notice Deduction of Rs.40,000/- . Whether we can claim deduction in Individual Income Tax Return as it is a loss to the employee, if the new employer donot pay Short Notice amount.
Your replies to the above query will be appreciated.
Thanks

Dear Arung4u,
According to me you should take his net earning as taxable income i.e. 10000/-. Net earning in this case is earning before statutory deductions, if any.

Your taxable income will be 10,000 that finally you get after deductions.

dear
whatever amount is not earned by individual ,income tax can not be deducted on that amount.
here individual has earned 10000 than his taxable income will be 10k only

I am a part of a company which delivers payroll related services/software and we have taken the view that notice period deduction amount cannot be considered for tax exemption for an employee for the following reasons.
1. The income tax act does not explicitly or implicitly allow such an exemption.
2. The notice period deduction is a penalty levied on an employee for not adhering to the terms of employment, i.e. serving a certain period of time after resignation prior to leaving the organization. This is somewhat similar to an employee paying a fine for losing a company property, say, laptop or mobile phone. The penalty an employee pays cannot be used for the purpose of claiming tax exemption.

Dear Tegautham,
I respect your point of view which is very convincing one. However, I request our Moderators to take second opinion on it from experts. We may be having many experts with us in citefin.

Dear,
What your company will treat Rs. 40K recovered from employee on account of Short Period Notice' as Income of the company or less expenditure of the company in their balance sheet? Accordingly take decision.
As per my knowledge, income received or receivable is taxable. This amt is neither received nor receivable by the employee.Hence, neither it is income of the employee nor expenditure of company.
Thanks
V K Gupta

Dear All
Thanks for your prompt response.
As per Tegautham, Income tax has to be paid on the amount deducted as short notice as it is like a penalty imposed on the employee for not serving the notice period. While other Members are of the opinion that we will have to pay only on Rs.10,000/- which is the actual received amount.
But in the same scenario, if employees have taken loan from HDFC, then the amount paid as interest is exempted from his Taxable income.
So my query is how can the employee pay incometax on the short notice which is already deducted from him. Can he claim for exemption? If yes, under what section can the employee show the exemption in the Incometax return?
Regards
Arun

Arun said: "As per Tegautham, Income tax has to be paid on the amount deducted as short notice as it is like a penalty imposed on the employee for not serving the notice period."



Just to clarify, I didn't say or mean the above. There is no income tax payable on the short notice deduction. The law does not provide for it. All I said was that the total taxable income of the employee cannot be reduced to the extent of short notice deduction (thereby giving a tax benefit to the employee on account of the short notice deduction).

Arun said: "While other Members are of the opinion that we will have to pay only on Rs.10,000/- which is the actual received amount."



The net pay cannot be considered for the purpose of tax calculation. If anything, the net pay is arrived at after tax deduction and hence the same cannot be used for tax calculation.

Tax calculation is always done on the gross pay after considering the tax rules governing individual heads of pay (Basic, HRA, Conveyance etc.). Some deductions such as Profession Tax can be used to reduce the total taxable income. However, without gross pay income tax cannot be calculated.

Dear Arun
Rs.40,000/- will be part of taxable income since under IT Act expenses/penalties are not allowed for deductions and here the taxable income will be Salary of Rs.30,000/- since leave encashment can be non-taxable to certain extent/whole as per rules at the time of leaving the services.
Regards
Rakesh