Tds on short notice pay
This query is : Resolved
03 February 2014
An employee gets an offer in a company(New Company). He has to give two months notice period in his existing company(Old company), if he fails to give sufficient notice he will have to pay two month`s salary. The New company promised him to pay the the notice period amount and take the employee. While making that payment the New Company deducts TDS, as it says it is salary.
If an employee spends some amount on behalf of company it can be reimbursed without TDS. This happens in case of mobile bills, hotel bills, air tickets etc. How is short notice period payment different from the others? Why should TDS be deducted on that?
If an employee spends some amount on behalf of company it can be reimbursed without TDS. This happens in case of mobile bills, hotel bills, air tickets etc. How is short notice period payment different from the others? Why should TDS be deducted on that?
03 February 2014
This amount is not given to perform his duties as an employee. The reimbursement of expenses like mobile bills, travel tickets are made him as he has to incur those expenses while performing his duties as an employee.
03 February 2014
Thanks for yoru reply. I dont think income tax act make any difference that way. Is the short notice pay liable to TDS?
03 February 2014
TDS is applicable as the amount paid by the company is not exempt in his hands. Any amount which is not exempt is liable to TDS.
03 February 2014
Cant I say that the notice period pay is also reimbursement and not deduct TDS?
03 February 2014
These are not Reimbursement of expenses, because it was not a liability of company to pay 2 months salary. Even if some payments are made by employee to third party on which TDS is required to be deducted like audit fee exceeding 30000 then the company has to deduct TDS.
04 February 2014
The company has specifically asked the employee to quit the old Company and join the New company, even if any payment needs to be made. It has agreed to pay the employee the amount he pays to the old company. There is an oral contract created here. Can this be enough to say that the Company is liable to pay this amount?
In CIT v. Raghunath Murti [2009] 178 Taxman 144 (Delhi), the assessee-managing director revised return because he had to refund certain sum to his employer-company as the same was found in excess of limits prescribed in the Companies Act, 1956. The Delhi High Court held that as the said refund was neither voluntary nor was it for any extraneous consideration, the same could not be held to be the assessee’s income and, therefore, was not assessable. The above text is provided from the views of Dr. Vinod K. Singhania
I am trying to save tax to one of my friend who is a poor guy and got recruited to MNC. He is just making money. I dont want him to loose when he can actually save it, within the parameters of law.
In CIT v. Raghunath Murti [2009] 178 Taxman 144 (Delhi), the assessee-managing director revised return because he had to refund certain sum to his employer-company as the same was found in excess of limits prescribed in the Companies Act, 1956. The Delhi High Court held that as the said refund was neither voluntary nor was it for any extraneous consideration, the same could not be held to be the assessee’s income and, therefore, was not assessable. The above text is provided from the views of Dr. Vinod K. Singhania
I am trying to save tax to one of my friend who is a poor guy and got recruited to MNC. He is just making money. I dont want him to loose when he can actually save it, within the parameters of law.
27 July 2025
Great question — this “short notice pay” situation often causes confusion!
Here’s a clear breakdown:
---
### What is Short Notice Pay (SNP)?
* Employee is required to serve a **notice period** (say 2 months) before leaving.
* If employee fails to serve full notice, pays the old employer **two months' salary** as compensation.
* New employer agrees to pay that amount to the employee (reimbursing the penalty).
* Question: **Is this amount taxable as salary? Should TDS be deducted?**
---
### Why is Short Notice Pay taxable and liable for TDS?
1. **Not a reimbursement of expense:**
Unlike mobile bills, travel expenses, hotel bills, which are incurred *on behalf* of the company and reimbursed, SNP is a **payment made to the employee as a part of employment compensation**.
2. **It's a benefit or income to the employee:**
The employee gets this amount from the new employer because of employment-related conditions. Hence, it qualifies as **salary income** under **Section 17 of the Income Tax Act**.
3. **No exemption for SNP:**
There is no exemption under the Act for such compensation or allowance paid to an employee.
4. **TDS applies:**
Since SNP is part of salary income, tax is deductible at source under **Section 192**. The new employer must deduct TDS on SNP when paying it.
---
### Can it be claimed as reimbursement?
* If the amount was actually **paid by employee to old employer**, and then the new employer just reimburses it, some may argue it's a reimbursement.
* But legally and practically, because the amount is paid *due to employment terms* and *benefits the employee*, tax authorities treat it as salary income, not mere reimbursement.
---
### Case Law Reference (for your friend):
* **CIT v. Raghunath Murti** deals with refunding excess amounts, which is a different fact scenario.
* Here, SNP is compensation for **not serving notice period**, which is an income for the employee.
* So, the amount is taxable.
---
### Practical advice:
* **TDS must be deducted by new employer on SNP** as salary.
* Employee can claim credit for this TDS while filing income tax return.
* If employee has genuine reasons and expenses, those can be claimed separately under the Income Tax Act, but SNP is not one of them.
---
### Summary
| Payment Type | Taxable? | TDS Required? | Explanation |
| --------------------------------------------- | -------- | ------------- | -------------------------------------------------- |
| Reimbursement of expenses (e.g. mobile bills) | No | No | Paid on behalf of employer, not income to employee |
| Short Notice Pay | Yes | Yes | Considered salary income, taxable under Section 17 |
---
If your friend wants to optimize tax legally, best way is to pay SNP and deduct TDS as per law, then file return and claim credit/refunds if applicable.
---
If you want, I can help draft a simple explanation letter or TDS calculation for your friend’s case. Would you like that?
Here’s a clear breakdown:
---
### What is Short Notice Pay (SNP)?
* Employee is required to serve a **notice period** (say 2 months) before leaving.
* If employee fails to serve full notice, pays the old employer **two months' salary** as compensation.
* New employer agrees to pay that amount to the employee (reimbursing the penalty).
* Question: **Is this amount taxable as salary? Should TDS be deducted?**
---
### Why is Short Notice Pay taxable and liable for TDS?
1. **Not a reimbursement of expense:**
Unlike mobile bills, travel expenses, hotel bills, which are incurred *on behalf* of the company and reimbursed, SNP is a **payment made to the employee as a part of employment compensation**.
2. **It's a benefit or income to the employee:**
The employee gets this amount from the new employer because of employment-related conditions. Hence, it qualifies as **salary income** under **Section 17 of the Income Tax Act**.
3. **No exemption for SNP:**
There is no exemption under the Act for such compensation or allowance paid to an employee.
4. **TDS applies:**
Since SNP is part of salary income, tax is deductible at source under **Section 192**. The new employer must deduct TDS on SNP when paying it.
---
### Can it be claimed as reimbursement?
* If the amount was actually **paid by employee to old employer**, and then the new employer just reimburses it, some may argue it's a reimbursement.
* But legally and practically, because the amount is paid *due to employment terms* and *benefits the employee*, tax authorities treat it as salary income, not mere reimbursement.
---
### Case Law Reference (for your friend):
* **CIT v. Raghunath Murti** deals with refunding excess amounts, which is a different fact scenario.
* Here, SNP is compensation for **not serving notice period**, which is an income for the employee.
* So, the amount is taxable.
---
### Practical advice:
* **TDS must be deducted by new employer on SNP** as salary.
* Employee can claim credit for this TDS while filing income tax return.
* If employee has genuine reasons and expenses, those can be claimed separately under the Income Tax Act, but SNP is not one of them.
---
### Summary
| Payment Type | Taxable? | TDS Required? | Explanation |
| --------------------------------------------- | -------- | ------------- | -------------------------------------------------- |
| Reimbursement of expenses (e.g. mobile bills) | No | No | Paid on behalf of employer, not income to employee |
| Short Notice Pay | Yes | Yes | Considered salary income, taxable under Section 17 |
---
If your friend wants to optimize tax legally, best way is to pay SNP and deduct TDS as per law, then file return and claim credit/refunds if applicable.
---
If you want, I can help draft a simple explanation letter or TDS calculation for your friend’s case. Would you like that?
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