A notice period is the window of time before you officially leave that your employer is informed of your leaving from their company. Basically, it begins before your resignation letter is sent and completes on your last day of employment. It’s normal anytime you leave a job to give the employer a few weeks to plan before you leave. A notice period means that your employer can seek a substitute or can reallocate your job effectively so that all is in order before you leave.
Your team may have to rush to take on your responsibilities and fill your place if you were to leave a job without reasonable notice. It’s better to quit an old job on better standing, and one way to do so is to submit your job notice period. Remember that during your notice time you are entitled to the same pay as usual, even though you are on leave due to sickness, on holiday, or on maternity/paternity/adoption leave. You have a right to the same contractual incentives, too. Usually, in many companies, the employer subtracts part of the salary assigned to this duration when an employee quits but does not serve the notice period according to the employment circumstances.
Outcomes by not serving the proper notice period
You can get a double hit if you leave your job without serving the full notice period. Not only can you undergo a pay cut in the notice period, but your new employer will also deduct TDS (tax deducted on source) on your entire month’s salary because salary income is taxable on a due basis or receipt basis under the Income Tax Act, whichever is earlier. And, even though the salary for the ineffective notice period has not been provided, you will be mandated pay tax on it.
For example, if you are liable to submit a notice of 1 month, but owing to certain circumstances, you submit a notice of just 15 days, then, since the employer will subtract 15 days’ salary from the complete and final settlement, the TDS imposed on the settlement would be for the full month’s salary and not only for 15 days, because under the Income Tax Act, salary income will become taxable until it becomes due, regardless of whether it is earned. Although, as a general rule, when an employee quit his or her job but does not fulfill a notice period, the employer deducts salary out of the period, but the income tax authorities do not accept it an exemption and attempt to tax the full salary owed in the hands of the employee (i.e. salary before such exemption).
In addition, there is no clause under the Income-Tax Act, 1961 to allow the employer to subtract a notice forfeited when an assessee quit his or her job without serving within a notice period. In a major decision in 2017, the Ahmedabad bench of the Income Tax Appellate Tribunal or ITAT stated that the money withheld from the employee’s compensation for not completing a notice period should not be counted as taxable income. “…in our opinion, the actual pay received by the taxpayer is only taxable and thus, we permit this scope of argument of the taxpayer,” the bench stated. In other ways, this implied that where the employee could not serve the time of notice on the principle of the terms of employment and the deduction from his or her salary in that respect, such deduction should not be regarded as an employee’s income and liable to income tax.
The decision was taken in a case involving an individual who did not provide a complete period of notice during his stay in two companies, and his employers withheld a certain amount before paying the actual salaries. In this particular situation, while filing an ITR, the individual had only shown net receipt as salary. The Income Tax Department claimed that compensation was taxable on a due basis, whether paid or not, and that this allowance was not allowed. The Tribunal, nevertheless, found in favor of the taxpayer. As per tax professionals, workers can demand the refund of the TDS withheld. That being said, owing to a lack of clarification in the Act on income tax, it may lead to lawsuits. The TDS withheld by the employer will be seen in the employee’s Form 26AS. Depending on the facts and circumstances in each case, a taxpayer can demand a refund in the event that the employer has deducted the whole salary in excess of the notice period. That being said, the prospect of tax officials contesting such an understanding cannot be counted out.
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