Didn’t serve notice period? Get ready for double whammy as TDS will be deducted along with salary cut

Didn’t serve notice period? Get ready for double whammy as TDS will be deducted along with salary cut

New Delhi: A notice period is the length of time your employer is aware of your departure from their company before you actually leave. Essentially, it starts when you submit your letter of resignation and ends on your last day of work. When you quit a job, it’s standard to give your company a few weeks to prepare before you leave.

A notice period ensures that your employer can find a replacement or can successfully redistribute your work so as to ensure that when you leave, everything is in order. If you were to quit a job without proper notice, your team may have to scramble to take over your tasks and fill your position. It’s best to leave an old job on good terms, and giving your serving notice period is one way to do so.

Note that you’re entitled to the same pay as normal during your notice period; even if you’re off sick, on holiday, or on maternity/paternity/adoption leave. You’re also entitled to the same contractual benefits. In many organisations, typically, when an employee resigns but does not serve the notice period according to the employment conditions, the employer deducts part of the salary attributed to this period.


Consequences of not serving the entire notice period:

If you leave your job without serving full notice period, you will get a double whammy. Not only will you experience notice period pay cut, but your existing employer will also deduct TDS (tax deducted on source) on your full month’s salary because under the Income Tax Act, salary income is taxable on a due basis or receipt basis, whichever is earlier. So, even if you haven’t received the salary for unserved notice period, you will have to pay income tax on it.

For instance, if you’re liable to serve a notice of 1 month, but due to some situation, you serve only 15 days notice, then while the employer will deduct 15 days salary from your full and final settlement, the TDS levied on the settlement will be on the full month’s salary and not just 15 days because under the Income-tax Act, salary income would become taxable once it becomes due regardless of whether it has been actually paid to an employee or not.

While typically, when an employee resigns but does not serve out the notice period, the employer deducts salary in lieu of this period but the Income-tax authorities do not consider such deduction and seek to tax the entire salary due in the hands of the employee (i.e. salary before allowing for such deduction). In fact, there is no provision under the Income-tax Act, 1961 to allow deduction of noticepay forfeited by the employer when an assessee-employee leaves his job, without serving during notice period.

In a significant ruling in 2017, the Ahmedabad bench of Income Tax Appellate Tribunal or ITAT ruled that an amount deducted from an employee’s salary for not serving out a notice period cannot be considered as taxable income. “…in our considered view, the actual salary received by the assessee is only taxable and therefore, we allow this ground of appeal of the assessee,” the bench said. In other words, this meant that where an employee has not served the notice period as per terms of employment and deduction has been made from his or her salary in this regard, such deduction could not be treated as income of employee and subjected to income tax.

The ruling came in a case related to a person who did not serve the full notice period during his stint at two companies and his employers had deducted certain amount while paying the final salaries. In this particular case, the person had shown only net receipt as income while filing his ITR. The Income Tax Department contended that salary was taxed on due basis, whether paid or not, and did not allow this deduction. However, the Tribunal ruled in favour of assessee.

As per tax experts, employees can claim refund of the TDS deducted. However, due to lack of clarity in the income tax act, it may lead to litigations. The TDS deducted by the employer will be visible in the Form26AS of the employee. Depending upon the facts and circumstances of each case, a taxpayer may claim a refund in case tax has been deducted by the employer on the full salary in lieu of the notice period. However, the possibility of tax authorities disputing such interpretation cannot be ruled out.