Allow deduction of payment for notice period

ICAI in its Pre-Budget Memorandum 2014 on Direct Taxes suggested that amount paid by salaried assessees for notice period is to be allowed as deduction.

As per the prevalent norm, the employees are required to serve notice within the stipulated time before leaving the  organisation. The notice period, however, varies from organisation to organisation. For example, in an organisation the notice period may be 90 days or an employee has to pay 90 days salary amount to the organisation as an employee may get a better job opportunity in another organisation wherein he is required to join within 30 days. Accordingly the employee has to give 30 days notice in old organisation, and pay for short notice of 60days. Generally the contract of service also provides that in case the employer is not satisfied with the performance of the employee he may terminate his services by giving a notice of 30 days or 30 days salary. In case the employer suspends the employee with immediate effect he pays an amount equivalent to 30 days salary and claims deduction thereof. Such amount becomes taxable in the hands of the employee. However, in case the employee is required to pay notice period salary, no deduction of such amount paid is allowed to him. If the new employer agrees to bear the brunt of notice period pay, say of 60 days in above example, the said amount will be  included in the total income of the employee and tax will be deducted thereon even if such income belonged to the exemployer and is taxable in his hands. Thus, in effect the assessee will be liable to pay tax on 14 months salary i.e. salary for more than 12 months without any deduction available to him.

It is suggested that said anomaly may be resolved and appropriate provisions be inserted so that income from notice period pay is chargeable in the hands of ex-employer and deduction of the amount of notice period pay paid be made available to the employee as he has not effectively received that income.

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