How Can I Avoid High Taxes on My Notice Period Reimbursement from My New Job?

Dear all,

I would like to have your advice on the reimbursement of the notice period amount. I have just taken up a new assignment in a retail company. While quitting my previous employer, I was supposed to give a 90-day notice to the company. As I could only give one month's notice, I had to pay Rs 48,000 to the company. My present employer has agreed to cover this cost.

Now, when I am asking for reimbursement of the said amount, my present employer is processing it through the payroll, and therefore, I have to pay substantial tax on it.

My queries are:
1. Is the current practice adopted by my present employer correct? If not, what are the alternatives available?
2. My present employer is asking for any legal opinion for processing this amount outside the payroll.

Kindly help.

Regards,
Sandeep Singh

Dear Sandeep,

Your present employer is correct. As per Sec 2 (24) of the Income Tax Act, salary means the salary you have earned from your present or past employer. While processing the payment, your present employer has to ensure that it is covered for the computation of your tax liability. I don't think you will get a reprieve in this matter. However, the notice period recovered from your previous employer may be taken as a negative figure to arrive at the salary earned since Form 16 issued by your previous employer has to be reduced to that extent. You will stand to gain there. On that basis, you can ask your present employer to rework your tax liability.

Regards,
Vishwanath

Hi Sandeep,

The concept of paying NP is now termed as Notice Period Buyout, which has become a trend. Since it's an income to you, it will definitely be computed for tax calculation. However, this amount has already been paid by you to your previous employer, so you can show this as a loss in earnings in your previous employment and subtract it from the earnings of the previous employer itself. Hope there will be no loss on the tax, as it's adjusted in your earnings in the previous employment.

Please ensure that this is reversed in your earnings in previous employment and shown as a loss in Form 16.

Regards,
Suresh Ramalingam