TDS on notice period pay

This query is : Resolved

TRISONKU KOTOKY (Querist)
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05 September 2008 Suppose, Mr. X is an employee of A Ltd. where there is a practice to give 3 months prior notice in case an employee wishes to leave his job.Else he will be required to compensate the company for the shortfall in notice period, if any, which is treated as notice period pay.

Now Mr.X got a new job offer from B Ltd. Mr X has served prior notice with A Ltd. but he has been pressed hard by B Ltd. to join as early as possible for which B Ltd has agreed to pay the notice period shortfall compensation, if any directly to A Ltd for the early release of Mr X from A Ltd.

Now the query is:

1)who will be liable to pay tax on this notice period pay paid by B Ltd.directly to A Ltd.

2)Can B Ltd. deduct TDS from Mr.X salary in B Ltd. for this notice period pay.

The querist shall be glad if the above querries are aptly replied.

CMA Jitendra Singh

CMA Jitendra Singh (Expert)
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05 September 2008 Notice Period payment is payment to discharge the liability by the Employess.It is application of Income.

In this case if Ltd has directly paid to A Ltd on behalf of Mr.X,so it is basically benefit to Mr.X and will be included in the total income of Mr.X as salary benefits and tax will be paid by Mr.X.

B Ltd will deduct TDS from the salary from Mr.X

TRISONKU KOTOKY

TRISONKU KOTOKY (Querist)
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05 September 2008 Thanks for your solution and reply.

However there is an apprehension here. Since this amount is payable by the employee of A Ltd. as per policy of the company. Hence, it is not a settlement against something that is lying outstanding in the concerned employee's account with A LTD.

Now the question is that the amount will have to be treated by A Ltd. as income from other source and pay tax on the same.

Hence deduction of TDS from Mr. X by B Ltd. will tantamount to double taxation.

Please have a relook on the same, based on my above point.