regarding taxability of notice period salary

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vishal aggarwal (Querist)
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29 March 2010 situation :
the terms of employment provides that if an employee wants to leave his job he will have to give 3 months notice period before leaving or otherwise compensating the company for same period with notice pay.
On 31st march 2010 employee left the job with one month notice period ( i.e. employee worked for 12 months including with 1 month notice period). Therfore, employee have to pay to his employer the compensation for two months notice pay salary.
on 1st april 2010 he will join new company and his new employer will reimburse the same amount which the employee have given to his previous employer for not giving 2 months notice period.
how will that be shown in form no. 16.
what will be tax treatment in both fiancial year.
(whether that compensation paid by employee will be allowed as deduction in previous year 2009-2010?)
how will be tds treatment by both the employer old and new?
whether there will be income tax refund on tds deducted on 2 months salary paid as compensation by employee to his employer?

CA. Pradeep Nayak

CA. Pradeep Nayak (Expert)
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29 March 2010 Amount paid by the employee in lieu of notice period is only an application of income. No deduction is available in this regard. In Form 16 there will be no mention regarding Notice pay recovery & entire salary earned during F.Y 2009-10 will be shown & taxed accordingly.

With regard to notice pay reimbursed by the future employer, the amount will be taxable in the hands of the employee as salary in F.Y 2010-11 & will accordingly be taxed.

Hence both employers are required to deduct tax on their respective portions.

vishal aggarwal

vishal aggarwal (Querist)
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29 March 2010 so it means that there will be no income tax refund on tds deducted on income paid as compensation by employee to his employer?

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