Income Tax: If you work in the private sector, then you must be well aware of the notice period. Do you know that if you do not serve the notice period of your company, you may have to pay double income tax.
Income Tax: Changing jobs is always exciting. Who doesn’t want a new place, new package and a boost in career? But, whatever efforts you make for a new job, some part of it should also be saved for the notice period after getting the job. All companies in the private sector usually keep a notice period of 1 month to 3 months. If you do not complete this notice period and try to manage it in some other way, then understand that you are going to be hit by a double whammy of income tax.
Sometimes it happens that your new company is not ready to wait for the notice period and it is also ready to compensate the penalty imposed by the old company. In such a situation, people think that their problem has been resolved and now they will not suffer any loss despite not serving the notice period. But, this matter is not so simple. Despite the new company compensating for it, the employee will have to pay the full price for not serving the notice.
How does notice period prove costly
Skipping the notice period does not just mean skipping the salary. It can also lead to double taxation. Employees are taxed on both the salary deducted by their previous employer and the compensation given by their new employer. This is a tax trap that surprises many people. This means that even if you do not lose the salary received during the notice period, double the tax will be recovered from you, which can be thousands of rupees.
Understand it in simple language
Suppose an employee’s salary is Rs 50 thousand per month and he has to resign and join another company. On resigning, he has to complete the notice period of two months, but he skips it. On this, his old employer recovers Rs 1 lakh, which is known as notice period recovery. The employee does not have to bear this loss because his new company wants to make him join as soon as possible by paying Rs 1 lakh. Everything is fine till here, but the employee gets a shock when he finds out that the old company has imposed tax on his salary for the entire 12 months, while instead of giving him the salary of 2 months, it has recovered it. Not only this, the new company also imposes tax on the salary of those 2 months, which was given to him in lieu of serving the notice period. Instead of this 12-month salary, tax has to be paid on the salary of 14 months. Experts say
Income tax experts say that in this case, if the employer deducts an amount from the employee’s salary for unserved notice, then the entire gross salary (before deduction) is considered taxable income. This means that the employee pays tax on the income that he never received. On the other hand, if the new employer compensates the employee for the notice period, then this payment is added to the employee’s taxable income. The root of this problem lies in the Income Tax Act, which calculates tax on salary income on a ‘due or received’ basis. According to Section 15 of the Income Tax Act, employees’ entire salary is taxable, whether they have actually received it or not. Businesses can claim deductions for bad loans or unrealized income, while employees do not have such a facility.
Why is such a law made?
Section 15 of the Income Tax Act imposes tax when the salary becomes due. This framework does not provide any clear relief to employees in cases of notice period recovery. The Act allows three deductions from salary income: standard deduction, deduction for entertainment allowance and deduction for professional tax. It does not allow employees to make adjustments for salaries they have never received. Addressing this anomaly should be a priority in the Union Budget 2025. It should be amended so that employees can claim deductions for notice period recovery under Section 16. To implement this, employers will have to separately report the amounts recovered in Form 16.
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