Moment guide · FY 2026-27
I am paying out my notice period or being paid for it
Is notice period buyout money paid to the employer tax-deductible?
If you pay your employer to waive the notice period, that payment is not deductible from your income — it is a personal capital outflow. Salary paid to you during a notice period, even garden leave where you do not work, is fully taxable under section 15. When you switch jobs mid-year, submit Form 12B to the new employer so aggregate TDS under section 192(2) is recomputed correctly.
Your legitimate options
Every route the statute actually gives you — with its condition, cap and deadline.
| Route | Condition | Cap / deadline |
|---|---|---|
| You pay the employer to buy out notice | Employee compensates the employer for the unserved notice period — NOT deductible for the employee | No deduction under any head; the amount is a personal capital payment |
| Employer pays you for garden leave | Salary paid during the notice period without work — fully taxable as salary | Taxable u/s 15 regardless of whether you worked |
| Multiple employers in the year | Provide Form 12B to the new employer so aggregate TDS is correct | Section 192(2) recomputation by the new employer |
The #1 trap
Trying to deduct the notice-period buyout amount paid to your old employer — it is not deductible under any section, and reels that call it 'expense against salary' are wrong. The reverse case is also misread: salary paid during a garden-leave notice period is fully taxable even though you did no work.
The decision path
Follow it top to bottom — the first condition that matches is your answer.
Worked example
Mehak, analyst switching firms with a one-month notice buyout
Mehak resigns from her current employer, which requires 90 days of notice. She negotiates a buyout: she pays the employer ₹1,20,000 to leave immediately. That ₹1,20,000 is a personal capital payment; it is not deductible against her salary or any other head of income, and the belief that it offsets salary is a common error. Her new employer pays her a salary of ₹30,00,000 a year, and she works from the first day of the next month. Because she had two employers in the financial year, she gives the new employer Form 12B showing her income and TDS from the old employer, so the new employer recomputes aggregate TDS under section 192(2) and does not under-deduct. The old employer, meanwhile, pays her salary for the days she actually served — say ₹40,000 — which is fully taxable. If instead the old employer had asked her to serve the notice period on garden leave without work but paid her full salary of ₹1,50,000, that entire amount would still be taxable salary under section 15, because the tax is on receipt, not on work performed. Her tax liability for the year is based on the total salary from both employers plus any buyout amounts she received, and she cannot reduce it by the ₹1,20,000 she paid out. If her total TDS falls short, she pays the balance as self-assessment tax before filing her ITR by 31 July, and reconciles both Form 16s against Form 26AS. Mehak keeps the buyout settlement letter and the relieving letter for records even though no deduction is available. A quick call with us dials in the final figure. Mehak also records the exact dates: the old employer's TDS certificate covers the salary paid up to her relieving date, and the new employer's certificate covers the rest, so her Form 26AS shows two sets of TDS entries that she reconciles against both Form 16s. If the buyout amount had been paid by the employer to her — a severance or garden-leave payment — it would be taxable salary in full, and any relief under section 89(1) for a compensatory payment would require Form 10E filed before the return. A quick call with us dials in the final figure.
Questions people actually ask
Sections: 15, 17(3), 192 · Last verified 2026-08-11 · Reviewed by Harun Raaj & Associates, Chartered Accountants. Every figure cites the Income-tax Act, 1961 (with ITA 2025 mapping via our section index).