As a salaried employee, it is important to be aware of the tax implications of the various forms of income you receive. One such form of income that may cause confusion is the notice period pay, which is paid by an employee to an organization when they leave their job before the end of their notice period. In this blog post, we will explore the taxability of notice period pay and the suggestions for resolving the issues associated with it.
What is Notice Period Pay?
As per the prevalent norm, the employees are required to serve notice within the stipulated time before leaving the organization. The notice period, however, varies from organization to organization. For example, in an organization the notice period may be 90 days, or an employee has to pay 90 days salary amount to the organization as an employee may get a better job opportunity in another organization wherein he is required to join within 30 days. Accordingly, the employee has to give 30 days’ notice in old organization and pay for short notice of 60 days.
Taxability of Notice Period Pay:
Generally, the contract of service also provides that in case the employer is not satisfied with the performance of the employee, he may terminate his services by giving a notice of 30 days or 30 days salary. In case the employer suspends the employee with immediate effect he pays an amount equivalent to 30 days salary and claims deduction thereof. Such amount becomes taxable in the hands of the employee. However, in case the employee is required to pay notice period salary, no deduction of such amount paid is allowed to him. If the new employer agrees to bear the brunt of notice period pay, say of 60 days in above example, the said amount will be included in the total income of the employee and tax will be deducted thereon even if such income belonged to the ex-employer and is taxable in his hands. Thus, in effect the assessee will be liable to pay tax on 14 months’ salary i.e. salary for more than 12 months without any deduction available to him.
Suggestions for Resolving the Anomaly:
It is suggested that the aforementioned anomaly may be resolved and appropriate provisions be inserted so that income from notice period pay is chargeable in the hands of ex-employer and deduction of the amount of ‘notice period pay’ paid be made available to the employee as he has not effectively received that income (unless reimbursed by the new employer).
This will ensure that the employee is not unfairly taxed on income that belongs to the ex-employer and that the employee is able to claim the appropriate deductions for any notice period pay that they are required to pay.
The taxability of notice period pay can be a confusing and complex issue for salaried employees. By understanding the current provisions and the suggestions for resolving the issues associated with it, salaried employees can better navigate this aspect of their tax liability and ensure that they are not unfairly taxed on income that belongs to the ex-employer. It is important to consult a tax professional to ensure compliance with the tax laws and regulations.