Treatment of Notice Pay Recovery and Notice Pay Reimbursemen

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This query is : Resolved

Rajen Pandya (Querist)

19 May 2011 Hi,

My previous employer had deducted some amount as Notice Pay Recovery in the Full and Final Settlement. The same amount was reimbursed by my new employer. My new employer had clarified that they will treat the reimbursed amount as over and above the salary and will consider it for taxation.

Question:
1. Is there any option available for any kind of tax benefit from this situation?
2. If yes, under which section?
3. If no, during the tax return filing for myself, can it be shown after net off of both these in order to arrive at taxable income?

Thanks.
Rajen

CA PARAS BAFNA

CA PARAS BAFNA (Expert)

19 May 2011 You may show salary income as under-

From 1st Employer -

Salary Income
Less: Notice Period Salary Deducted

From 2nd Employer
Salary Income
Add: Notice Period Salary Reimbursed.

Rajen Pandya

Rajen Pandya (Querist)

20 May 2011 Hi Paras,

Thanks for your reply. However, whether this kind of clarification is available anywhere in Indian Income Tax world? Logically I agree with what you said, but the department will ask for the authenticity of this kind of adjustment w.r.t. IT Act.

Regards,
Rajen

Rajen Pandya

Rajen Pandya (Querist)

23 May 2011 Hi,

Anybody is having any idea of the tax treatment as per law?

Regards,
Rajen

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

02 August 2025 Here’s a clear explanation regarding the **treatment of Notice Pay Recovery and Notice Pay Reimbursement** under Indian Income Tax:

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### Scenario Recap:

* **Previous employer** deducted notice pay recovery from your final settlement (i.e., reduced your salary by that amount).
* **New employer** reimbursed the same amount and included it as part of your salary.
* You want to know if there’s any tax relief or adjustment possible.

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### 1. **Tax Treatment under Income Tax Act**

* **Salary Income is taxed on a gross basis** from each employer independently.
* The **deduction of notice pay by the previous employer** is effectively a reduction in the salary paid by that employer.
* The **reimbursement of notice pay by the new employer** is treated as a fresh income — an additional salary component.

Therefore, both amounts are taxable income but arise from two separate employers.

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### 2. **Is There Any Section for Set-Off or Adjustment?**

* The Income Tax Act **does not have any specific provision to “net off” these two amounts** because they are incomes from two different employers.
* Tax is computed on **gross salary income received or receivable** from each employer.
* No direct exemption or adjustment is available under sections like 80C or 80D.

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### 3. **Can You Adjust During Filing of Returns?**

* During tax filing, you must **show the income as reported by both employers**.
* You **cannot net off the deduction from the first employer with reimbursement from the second employer**.
* However, you can explain this situation in the return or attach a letter clarifying the nature of income to avoid any issues during assessment.

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### 4. **Practical Approach and Suggestions**

* Keep supporting documents handy — Final Settlement statement from previous employer showing notice pay deduction and salary slip or certificate from new employer showing reimbursement.
* If questioned by the tax department, this documentation will clarify the income nature.
* You may mention the reimbursement as a **"Notice Pay Reimbursement"** in the salary section to distinguish it.

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### Summary Table

| Amount | Treatment |
| ------------------------ | --------------------------------------------------------------- |
| Notice Pay Recovery | Deducted from salary by old employer, taxable as reduced salary |
| Notice Pay Reimbursement | Included in new employer's salary, taxable as income |
| Netting off | Not allowed under Income Tax Act |
| Documentation | Maintain proof for explanations if needed |

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If you want, I can help draft a sample letter or explanation for your tax return to explain this situation. Would you like that?

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