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.

Notice pay recovery is a contractual deduction and not a separate taxable income.

As per Section 15 & Section 192 of the Income-tax Act, salary is taxable only to the extent it accrues or is actually payable to the employee. Amount recovered towards shortfall of notice period never becomes income in the hands of the employee.

In this case:

• Salary for the month : ₹1,40,000
• Notice pay recovered : ₹1,12,000
• Net salary accrued : ₹28,000

✅ Employer should report ₹28,000 only as salary in Form 24Q and deduct TDS accordingly.
❌ Gross amount of ₹1,40,000 should not be reported.

Setindiabiz

Both views exist; be careful with Form 16:

• Income-tax (employee): salary is taxable on "due" or "paid" basis (Sec 15). The notice-pay shortfall recovered by the employer is a liability of the employee under the contract. Tribunals differ:

– Some (e.g. ITAT Chennai and Bangalore benches) allow the notice pay recovered to be excluded or reduced from taxable salary, since the employee never received it.

– Others hold that gross salary is taxable and the recovery is an application of income.

Many employers show gross salary in Form 16 and the recovery separately. The employee then claims a reduction in the ITR, with documentation, which may be contested.

• Practical: if the employer adjusts the recovery against salary already "due" in the final month, it is better to compute TDS on the net amount actually payable, with a clear F&F statement. Some employers do this to avoid the dispute.

• GST: CBIC Circular 178/10/2022 says notice pay recovered for leaving without notice is not consideration for a separate supply ("tolerating an act"). So no GST on the notice-pay recovery.

• Employer's books: the recovery reduces salary cost (or is shown as other income).