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Notice Period & Buyout Guide (FY 2026-27)

Notice Period Buyout: Calculation, Taxability & GST Rules (2026)

Switching jobs with an unserved notice period? Detailed mathematical guide on notice pay recovery, new employer reimbursement, and income tax TDS liability.

Quick Summary: Notice Period Buyout Rules (FY 2026-27)
  • Calculation Base: Notice buyout is calculated strictly on your Monthly Basic Salary (or Gross Basic in some service MNC contracts) pro-rated by unserved calendar days.
  • Double Taxation Risk: If your new employer reimburses your notice buyout, that reimbursement is treated as perquisite salary and taxed at your top slab rate.
  • GST Verdict: The Central Board of Indirect Taxes & Customs (CBIC) clarified that notice period recovery is NOT subject to 18% GST as it is an employer-employee contractual exit adjustment.

Notice Period Recovery Formula

Notice Recovery Amount = (Monthly Basic Pay / 30) × Unserved Notice Period Days

Notice Buyout Math for a 10 LPA CTC Professional (₹40,000 Basic / 60 Days Shortfall)

Line Item / Component Amount Calculation Basis & Remarks
Monthly Basic Pay ₹40,000 40% of 10 LPA CTC
Daily Basic Salary Rate ₹1,333.33 ₹40,000 / 30 days
Unserved Notice Period Shortfall 60 Days 2 months unserved period
Total Notice Buyout Recoverable ₹80,000 60 days × ₹1,333.33
New Company Buyout Reimbursement ₹80,000 New company pays joining buyout
TDS Withholding on Reimbursement (30% slab) -₹24,960 Taxed as taxable allowance in first payslip
Net Out-of-Pocket Cash Impact ₹0 (Gross Neutral) Reimbursed against official FnF receipt

How to Protect Yourself from Double Taxation on Notice Buyouts

When you leave Company A without serving full notice, Company A deducts the buyout from your FnF. If Company B reimburses this amount, Company B adds it as taxable earnings in your payslip, triggering TDS deductions. To minimize out-of-pocket loss:

  1. Request Company B to structure the buyout as a direct vendor reimbursement or joining relocation allowance against your FnF receipt.
  2. Ensure Company A reflects the notice recovery on your final Form 16 Part B to prevent paying income tax on unearned salary.

Instant Offer In-Hand Estimator (FY 2026-27)

Enter any offered CTC package in LPA to estimate your exact monthly take-home credit:

Frequently Asked Questions

Is GST applicable on notice period recovery in India?

No. In Circular No. 178/10/2022-GST, the Ministry of Finance clarified that notice period forfeiture/recovery by an employer is an integral part of employment contract terms and does NOT attract 18% GST.

Can an employer refuse a notice period buyout in India?

Yes. Notice buyout is not a statutory employee right unless explicitly stipulated in your appointment letter. The employer has the discretion to insist on serving full notice for critical project deliverables or knowledge transfer (KT).

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