Notice period buyout in India: rules, how it’s calculated, and tax

ReportsIshaan VardhanOct 8, 20267 min read

When you resign from an Indian job, your employment contract usually requires you to keep working for a set notice period. If your new employer wants you sooner, the usual way out is a buyout: you pay your current employer for the days you don’t serve, or it deducts that amount from your final settlement. This explainer covers what the law says, how the amount is calculated, who ends up paying, and how income tax and GST apply.

What the law says, and what your contract says

India has no single central law that fixes how much notice a salaried employee must give when resigning. According to a 2024 practice note by law firm Nishith Desai Associates, the rules come from three places:

• Your employment contract and HR policies. For most office jobs, these set both the notice period and whether a buyout is allowed.
• Standing orders. These are employment terms certified for some establishments under the Industrial Employment (Standing Orders) Act, 1946, and they mostly cover non-managerial staff.
• State shops and establishments laws. Some of these set a minimum notice for employees who resign. Under the Punjab Shops and Commercial Establishments Act, 1958, for example, an employee with three months’ continuous service must give 30 days’ notice or pay in lieu.

Labour law focuses mainly on the employer’s side. Under section 70 of the Industrial Relations Code, 2020, in force since 21 November 2025, an employer retrenching a worker with at least a year’s service must give one month’s written notice or pay wages in lieu. For a resigning employee, the same practice note says there is no legal provision on buying out notice beyond pay in lieu. In practice, whether you can buy out your notice is up to your contract and your employer’s discretion, not a right.

Courts do look at fairness. The practice note says labour courts are unlikely to accept an employee being held to a much longer notice period than the employer has to give. It cites the Supreme Court’s 1986 judgment in Central Inland Water Transport Corporation v Brojo Nath Ganguly on unequal bargaining power. It also says that if you leave without serving notice, courts rarely award an employer more than the notice-period pay unless it proves actual losses.

Once you have left, the clock runs on your employer. Section 17(2) of the Code on Wages, 2019 requires wages due to an employee who resigns to be paid within two working days.

How the buyout amount is calculated

The basic formula is simple:

Buyout = (monthly salary used by your contract ÷ days in a month) × notice days not served

Three details decide the final figure, so check each against your offer letter or HR policy:

• Basic or gross. Some contracts use basic pay, others gross salary. On a ₹1 lakh gross salary with ₹60,000 basic, the difference is large.
• The divisor. Most firms divide by 30 calendar days, and some use 26 working days.
• Set-offs. Some employers let you adjust earned leave against unserved notice or release you early at their discretion. Ask for this in writing.

An example: your notice period is 90 days, you have served 30, and your contract uses monthly basic pay of ₹60,000 with a 30-day divisor.

• Days left: 90 − 30 = 60.
• Daily rate: ₹60,000 ÷ 30 = ₹2,000.
• Buyout: ₹2,000 × 60 = ₹1,20,000.
• If the contract uses gross pay of ₹1,00,000 instead, the buyout is ₹3,333 × 60, or about ₹2,00,000.
• If HR lets you set off 10 days of earned leave on the basic-pay version, only 50 days remain, and the buyout falls to ₹1,00,000.

Our notice period buyout calculator does this arithmetic for you. Enter the salary figure your contract uses, the days served and any leave set-off.

Who pays: you or the new employer

There are two common routes.

You pay. The amount is deducted from your full and final settlement, or you pay the shortfall if your dues don’t cover it. This is the cleanest route with your old employer, but the cost is yours unless you negotiate otherwise.

The new employer pays. Hiring companies that want you quickly often reimburse the buyout, either as a line in the offer or as a joining bonus. Get it in writing, including when it will be paid and whether you must repay it if you leave within a set period. Check also whether the figure is before or after tax, because that changes what you actually receive.

How income tax and GST apply

Income tax when your old employer deducts notice pay

The Income-tax Act, 2025 has no specific deduction from salary for notice pay you give up. In Nandinho Rebello v DCIT (17 April 2013), the Ahmedabad bench of the Income Tax Appellate Tribunal held that notice pay deducted by an employer is not taxable, because the employee never received it; only the salary actually received is taxed. If your Form 16 shows the full salary before the recovery, ask payroll whether they can report the reduced figure. Tribunal rulings are persuasive rather than binding everywhere, so take advice if a large amount is involved.

Income tax when the new employer pays

A reimbursement or joining bonus from your new employer is taxable as salary. Section 18(1)(b) of the 2025 Act treats any amount received from a person before joining their employment as “profits in lieu of salary”. At the 30% slab, tax plus 4% cess takes about 31.2% of it. A ₹1,20,000 reimbursement would therefore leave about ₹82,560 after tax. If the offer is meant to make you whole, ask for the amount to be grossed up.

GST on notice pay recovery

Some employers used to add 18% GST to notice pay recoveries, and some advance rulings had upheld that. The CBIC’s Circular No. 178/10/2022-GST of 3 August 2022 (paragraph 7) says amounts such as forfeiture of salary for leaving employment early are not payment for “tolerating” an act. They are therefore not a supply, and GST does not apply. On 7 December 2022, the Kerala High Court applied the circular to notice pay in Manappuram Finance Ltd v Assistant Commissioner, allowing the employer a refund of GST it had paid. On 27 March 2025, the Maharashtra Authority for Advance Ruling also held, in Ferrero India’s case, that notice pay recovery is outside GST. If your settlement statement adds GST to a notice pay recovery, point HR to the circular.

How to negotiate a shorter or cheaper exit

1. Read your contract first. Note the notice period, whether the employer may waive it, whether buyout is allowed, and which salary figure applies.
2. Resign in writing and propose a last working day. Offer a handover plan; a documented handover is the best argument for early release.
3. Ask for leave set-off before you offer to pay.
4. Negotiate the buyout with your new employer while the offer is open, not after you sign. Ask whether the amount is gross or net of tax and whether it carries a clawback.
5. Get every agreed change, such as the release date, waiver or settlement amount, confirmed by email from HR.
6. Check your full and final statement for GST added to notice pay and for the correct salary basis.

If you are exploring a move, browse current openings on our jobs board.

Frequently asked questions

Can my employer refuse a notice period buyout?

Usually yes, unless your contract gives you a right to pay in lieu of notice. Nothing in central law gives a resigning employee that right. Many employers still accept a buyout or release people early, so it is worth asking.

Is notice period buyout calculated on basic or gross salary?

Whatever your contract says. Both are common, and the difference can be large, so confirm the basis with HR before you agree to an amount.

Do I pay GST on my notice period buyout?

It should not be charged. CBIC Circular 178/10/2022-GST treats such recoveries as outside GST, and the Kerala High Court and the Maharashtra Authority for Advance Ruling have applied that reasoning to notice pay.

If my new employer reimburses the buyout, is it tax-free?

No. It is taxed as salary in your hands as “profits in lieu of salary”, so you will lose part of it to tax unless the employer grosses it up.

How soon must my old employer settle my dues?

Section 17(2) of the Code on Wages requires wages due on resignation to be paid within two working days. Other dues, such as gratuity, follow their own rules.

This explainer is general information, not legal or tax advice. Employment terms and state laws vary, so please confirm your own case with a chartered accountant (CA) or an employment lawyer.