Salary Deducted For Not Serving Notice Period Taxable? Good News For You

Income tax authorities tend to tax the entire salary due, whether paid or not. (Representational image)

In a significant ruling, the Ahmedabad bench of Income Tax Appellate Tribunal or ITAT recently ruled that an amount deducted from an employee's salary for not serving out a notice period cannot be considered as taxable income. "...in our considered view, the actual salary received by the assessee is only taxable and therefore, we allow this ground of appeal of the assessee," the bench said last month. In other words, this means that where an employee has not served the notice period as per terms of employment and deduction has been made from his or her salary in this regard, such deduction could not be treated as income of employee and subjected to income tax.

The ruling came in a case related to a person who did not serve the full notice period during his stint at two companies and his employers had deducted certain amount while paying the final salaries.

In this particular case, the person had shown only net receipt as income while filing his return of income. The Income Tax Department contended that as salary was taxed on due basis, whether paid or not, and did not allow this deduction. However, the Tribunal ruled in favour of assessee.

Commenting on the tribunal's ruling, Sandeep Sehgal, director for tax and regulatory at Ashok Maheshwary & Associates LLP, said, "This is a significant ruling. The person got only net amount in his hands and the deductions were made by the employers beforehand. The tribunal recognised this fact and concluded that such deductions made can't be considered as income in the hands of the person as this is not a real income."

In many organisations, typically, when an employee resigns but does not serve out the notice period according to the employment conditions, the employer deducts part of the salary attributed to this period. Income tax authorities however tend to tax the entire salary due, whether paid or not. Hence, the Tribunal's order assumes significance after it said that the deducted amount could not be considered as taxable salary income.