Is It Fair for My New Company to Deduct Income Tax from Notice Pay Reimbursement?

I would like to know if it is justified that the notice period amount from my previous company, which was supposed to be reimbursed by my new company, had income tax deducted from it. I feel it's not correct as it is not my income.

Regards,
Prabhakar

The claim for the shortfall of the notice period is an income, not a reimbursement. Therefore, TDS will be deducted. To make it easy to understand, had you not left the organization, you would have received the same amount in your income. Hence, it is not a reimbursement, as you have not borne the expenses for which you are claiming.

Hope it is clear.

Regards,
Satpreet Kaur

Thank you for the reply, but I am still confused. I will explain again. I left Company X after paying a 2-month notice period amounting to 2 lakhs. Company Y agreed to pay my notice period amount of 2 lakhs. When Company Y paid my December salary, they reimbursed that amount after deducting tax. As you said it's my income, where does the question of income arise? I only paid 2 lakhs to Company X and joined Company Y, which then deducted income tax from the salary they paid.

Question on Reimbursement Process

My question is, why couldn't Company Y pay directly to Company X? Why should I lose that amount? I hope you understand my question now.

Regards,
Prabhakar

As I explained earlier, this is not the expense that was borne by you, for which you are claiming reimbursement. It's an income for two months that you would have received from the previous employer if you had served the notice period. Please read the example below:

You were working with Company X and resigned. Company X asked you to serve a notice period of 2 months, in other words, to continue with the service for another two months for a proper handover. However, Company Y wanted you to join early and agreed to pay you the loss of payment for the 2-month shortfall. Therefore, the payment that you were earlier supposed to get from Company X is now being received from Company Y. Thus, the TDS has been deducted since it's a payment, not a reimbursement.

I hope it's clear now.

Regards,
Satpreet Kaur

Notice Pay Reimbursements and Taxation

Notice pay reimbursements are always taxable as they are considered income in the hands of employees. Satpreet has rightly explained this.

Pon

Tax Deduction Rule for Notice Pay Reimbursement

What's the tax deduction rule for the notice pay reimbursement amount? I feel that I should be receiving the same amount in hand from my new employer as I was getting from my previous employer after tax deductions. However, this is not the case for me. More tax has been deducted by my new employer.

The rule for tax deduction is the same as what's applicable for income tax. You might be feeling that more has been deducted now with the increased income from the new salary plus the notice pay. The tax would surely be higher if the investments are not in place.

Regards,
Ashutosh Thakre