Dear Salary/labour law Expert,
I have a query regarding paying salary in notice period.
If the company fires any person, then company is liable to pay the salary of the notice period.
To pay basic salary or gross salary of 30 days to the employee?
Please confirm as per ESI/PF law and Labour law also.
| Here is the complete tax treatment of notice period payments: 1. Salary During Working Notice Period: - If the employee serves the notice period and receives regular salary during that period, it is fully taxable as 'Income from Salary' in the year of receipt - No special exemption — standard tax deductions (HRA, standard deduction of Rs. 75,000, etc.) apply as normal - TDS is deducted by employer as usual 2. Payment in Lieu of Notice (PILON) — Employee Pays Employer: - If the employee leaves without serving notice and pays the employer (notice period buy-out), this payment is NOT deductible for the employee under income tax — it is treated as a personal expenditure - However, if the employer deducts it from the last month's salary, only the net salary (after deduction) is the taxable salary 3. Payment in Lieu of Notice (PILON) — Employer Pays Employee: - If the employer terminates employment and pays the employee salary for the notice period (without requiring them to work), this amount is fully taxable as salary - Some argue it could qualify under Section 10(10B) (retrenchment compensation) — but only if paid as retrenchment compensation per the Industrial Disputes Act, not as simple notice pay 4. Taxability in Correct Year: - For departed employees, include notice pay in the year in which it is received/accrued - Former employer must issue Form 16 reflecting all payments (including notice period pay) before 15th June 5. TDS Obligation: Employer must deduct TDS on notice pay at the applicable slab rate before disbursement. |
BANSAL YOGESH AND CO
Gautam Budh Nagar
B.Com
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