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FY 2025-26 / AY 2026-27. The section references here are to the Income-tax Act, 1961. Check the law for your income year before applying this discussion to a later job change.
A buyout can reduce the cash available when you change jobs. Start with two separate amounts: what the old employer will recover under your contract, and what the new employer will actually pay after tax. Neither amount by itself settles how the recovery should be reported in your tax return.
Estimate ordinary salary tax or compare the two offers. These tools help with the financial comparison; they do not decide notice-pay deductibility.
Identify the payment arrangement
| Arrangement | What to establish |
|---|---|
| Old employer deducts notice pay from the final settlement | Salary earned, recovery basis, gross and net settlement, and tax reporting |
| You pay the old employer separately | Contractual liability, payment date and evidence, and whether the facts support any different salary treatment |
| New employer pays your liability directly | Who owes the amount and how the employer will report the benefit |
| New employer pays a cash joining bonus | Gross amount, TDS, payment date and any repayment clause |
The recovery formula comes from the agreement; it need not use total CTC. Do not assume that every employer uses the same salary components or day-count convention.
What the salary rules establish
Salary can be taxable when it becomes due, even before payment. A difference between gross salary and bank receipts therefore does not, on its own, prove that the difference is outside taxable income. See the Income Tax Department's salary guidance.
Where a new employer pays an obligation you would otherwise owe, Section 17(2)(iv) provides for a taxable perquisite. This is the employee-obligation provision; it is not the separate provision about life assurance. Confirm the actual arrangement with payroll.
A documented tribunal decision, with its limits
In Nandinho Rebello v. DCIT, ITAT Ahmedabad, ITA No. 2378/Ahd/2013, 18 April 2017, the tribunal allowed the notice-pay ground involving ₹2,76,744 recovered by two former employers. Paragraph 7 explains its conclusion about actual salary received after recovery under the employment agreements. Read the tribunal order reproduced on Indian Kanoon.
The order concerns AY 2010-11 and specific facts. It is not a general instruction to subtract any cash buyout from taxable salary, nor does it decide the treatment of a new employer's reimbursement. Ask a tax professional to assess the full order, your facts and any relevant later authority before taking a different position from payroll. This article does not claim an exhaustive survey of decisions or guarantee how a return will be processed.
A reimbursement can leave a cash shortfall
Our illustration assumes a resident employee under 60 in the new regime, ₹30 lakh ordinary gross salary, no other income and only the ₹75,000 standard deduction. A ₹2 lakh cash joining bonus is added on top. We assume no deduction for the old employer's ₹2 lakh recovery in this cash-planning comparison.
| Item | Amount |
|---|---|
| Tax before the bonus | ₹4,75,800 |
| Tax after adding the bonus | ₹5,38,200 |
| Additional tax, including 4% cess | ₹62,400 |
| Bonus left after that additional tax | ₹1,37,600 |
| Shortfall against a ₹2 lakh recovery | ₹62,400 |
These independently calculated figures use the official AY 2026-27 slabs. The entire bonus falls in the 30% slab in this example; no surcharge or rebate applies. Other incomes can cross slabs or rebate thresholds, so multiplying every buyout by 31.2% is not a general method. TDS timing can also differ from final annual tax.
The calculator does not model notice-pay recovery. Use it to compare salary with and without a taxable bonus, then budget the recovery separately. Do not disguise the recovery as another deduction.
Before signing the offer or filing
- Ask the old employer for the notice clause and a written recovery calculation, including what serving additional days would change.
- Ask the new employer whether its commitment is a gross payment, a direct payment or a guaranteed net reimbursement. Request a payroll illustration and check any clawback.
- Keep the settlement, payslips, payment evidence and Form 16 documents. Reconcile differences rather than assuming a bank credit is the taxable figure.
- For a disputed filing treatment, obtain advice on the legal basis and applicable return procedure. This guide does not recommend entering a lower salary solely to obtain a refund.
For the related repayment risk, read the joining-bonus and clawback guide.
FAQ
The follow-up questions people usually ask after the main recommendation is already clear.
Is notice period buyout automatically deductible?
No automatic deduction is established by a recovery entry alone. The employment agreement, how salary accrued, how recovery occurred and the applicable legal position need review. Obtain case-specific advice before reducing the salary reported in your return.
What if my new employer pays the old employer directly?
Section 17(2)(iv) concerns an employer paying an obligation that the employee would otherwise have to pay. A direct notice-buyout payment can fall within this provision; ask payroll to confirm the contract and tax treatment. It is not made tax-free by bypassing your bank account.
Can the salary calculator determine whether the recovery is deductible?
No. It estimates ordinary salary tax for the stated year. It has no notice-recovery eligibility assessment; do not enter a disputed recovery as 80C, HRA or another unrelated deduction.
Which documents should I keep?
Keep your notice clause, resignation acceptance, recovery calculation, full-and-final settlement, payslips, proof of payment and both employers' Form 16 documents. Obtain written clarification for any mismatch.