Notice period buyout: what it costs and how it is taxed
Updated 11 October 2026
A notice period buyout means paying your employer, or having it recovered from your final settlement, for the part of the notice period you do not serve. How much you pay, and whether it is based on basic or gross salary, is set by your appointment letter; for most private jobs no law fixes it. If your new employer reimburses the buyout, that reimbursement is taxable as salary.
Where your notice period comes from
Most office jobs set the notice period in the appointment letter or HR policy. Thirty days is common, and 60 to 90 days is usual in IT and senior roles. Industrial workers covered by standing orders follow those, and government servants follow their service rules. The clause typically says you must serve the notice or pay salary in lieu of it, and that the employer may waive or shorten it.
The rule also runs the other way. If an employer retrenches a worker with at least one year of continuous service, the Industrial Relations Code, 2020 requires one month's written notice or wages in lieu of it, plus retrenchment compensation of 15 days' average pay for each completed year. People employed mainly in managerial or administrative roles, and supervisors above a wage limit, are not "workers" under the Code, so for them the contract decides.
How the buyout is calculated
The usual formula is (monthly salary base ÷ 30) × unserved days. The base is whatever the contract says: often gross monthly salary, sometimes basic pay. Some employers divide by the number of days in the month, or by 26.
Ways to reduce the amount
- Ask for early release once your handover is done; many managers agree if the work is covered.
- Adjust earned leave against the shortfall, if your policy allows it.
- Agree on a partial buyout: serve some of the days and pay for the rest.
- Get any waiver or adjustment in writing, so that it shows up correctly in your final settlement.
Can it be cut from your final salary?
In practice, employers usually recover the amount from the final settlement. Under the Code on Wages, in force since 21 November 2025, an employer may make only the deductions the Code lists, and notice-pay recovery is not one of them, so some lawyers argue it must be claimed separately rather than cut from wages. Courts have not yet settled the point. Indian courts do not force anyone to keep working under a service contract; what the employer can claim is the amount the contract specifies. The practical pressure is usually the relieving letter, so agree the figure in writing. See full and final settlement.
Is there GST on notice pay?
Generally, no. Some advance rulings before 2022 treated notice pay recovered from an employee as a taxable supply. CBIC's Circular 178/10/2022-GST of 3 August 2022 then clarified that amounts recovered as a penalty for breaking a contract are not consideration for a supply, and the Kerala High Court held in 2022 that notice pay recovered by an employer is not liable to GST. Employers now generally recover it without adding GST.
Income tax on notice pay
- Paid by you: there is no specific deduction for notice pay. Where the employer cut it from your salary, the Ahmedabad bench of the Income Tax Appellate Tribunal held in 2017 (Nandinho Rebello) that only the salary actually received is taxable. If your Form 130 (Form 16 for earlier years) shows the gross figure, take advice before reporting a lower salary, because a mismatch can trigger a notice.
- Reimbursed by your new employer: fully taxable as salary, with TDS.
- Paid to you in lieu of notice, when an employer lets you go without notice: taxable as salary.
Check the effect on your tax with the income tax calculator, and see CTC vs in-hand salary for how offers are put together and TDS on salary for how the tax is deducted.