Notice pay deduction from net pay - taxability

In my opinion, the employer should report the gross salary of ₹1,40,000 in Form 24Q/Form 16 and show ₹1,12,000 as notice pay recovery/contractual recovery from final settlement. Salary is taxable on due or receipt basis, whichever is earlier. Since salary for the month served became due, subsequent deduction towards shortfall in notice period should not automatically reduce taxable salary. Therefore, a conservative tax position would be to tax/report ₹1,40,000 and not merely ₹28,000.

However, if the employment contract and payroll policy clearly provide that the salary entitlement itself is reduced by notice pay recovery, the employer may support net reporting, but proper documentation should be maintained.