A notice period buyout is pay for the notice days you do not serve, charged on basic or gross salary as your contract says, so on a ₹75,000 basic the same 60 days cost ₹1,50,000 or ₹2,82,000. If your new employer reimburses it, the reimbursement is taxed as salary in the new job, while the amount you pay the old employer reduces your taxable salary only in some cases.
How is a notice period buyout calculated?
Your contract or HR policy sets the base (basic or gross salary) and the day count. Many divide a month's pay by 30; others use the days in that month, or 26 working days, which raises the figure when every unserved calendar day is still charged. You pay nothing if the employer agrees to an early release.
Gross is monthly pay before your own PF and tax; it excludes the employer's PF, as CTC vs in hand salary shows. With basic at about half of total pay, gross is nearly twice basic, and more than twice where basic is a smaller share of pay.
Ritwik's 60 days: ₹1,50,000 on basic, ₹2,82,000 on gross
Ritwik has a 90-day notice period. His ₹75,000 basic is half his ₹1,50,000 monthly pay once the employer's ₹9,000 of PF is counted; his gross salary is ₹1,41,000 a month and his CTC, with gratuity at 4.81% of basic, about ₹18.4 lakh. His new employer wants him in 30 days and offers to reimburse the buyout of the other 60. At a 30-day month:
On basic: ₹75,000 × 60 ÷ 30 = ₹1,50,000
On gross: ₹1,41,000 × 60 ÷ 30 = ₹2,82,000
Ritwik's 2026-27 taxable income from both jobs, after the ₹75,000 standard deduction, is ₹17 lakh before the reimbursement, so under the new regime it is taxed at 20.8%, the 20% slab plus 4% cess:
₹2,82,000 × 20.8% = ₹58,656 of tax, leaving ₹2,23,344
₹1,50,000 × 20.8% = ₹31,200 of tax, leaving ₹1,18,800
A plain reimbursement leaves him short by the tax; to make him whole on the basic figure, the new employer would gross it up to ₹1,89,394, carrying ₹39,394 of tax. In the 30% slab (taxable income above ₹24 lakh before it, and within ₹50 lakh with it) the tax is ₹87,984 on ₹2,82,000 and ₹46,800 on ₹1,50,000.
How much is a 60-day buyout at other salaries?
The table keeps Ritwik's structure: basic at half of total pay.
| Monthly basic | CTC, about | Gross a month | 60 days on basic | 60 days on gross |
|---|---|---|---|---|
| ₹75,000 | ₹18.4 lakh | ₹1,41,000 | ₹1,50,000 | ₹2,82,000 |
| ₹1,00,000 | ₹24.6 lakh | ₹1,88,000 | ₹2,00,000 | ₹3,76,000 |
| ₹1,25,000 | ₹30.7 lakh | ₹2,35,000 | ₹2,50,000 | ₹4,70,000 |
| ₹1,50,000 | ₹36.9 lakh | ₹2,82,000 | ₹3,00,000 | ₹5,64,000 |
Who pays the tax, and does notice pay recovery cut your taxable salary?
You do, through the new employer's payroll. Paid straight to your old employer, the buyout is a perquisite under section 17(2)(iv) of the Income-tax Act, 1961. Paid to you before you join, it is profits in lieu of salary under section 17(3)(iii). Either way the new employer deducts TDS at your average rate (section 192 of the 1961 Act, section 392 of the 2025 Act), shown in your Form 16 (Form No. 130 from tax year 2026-27). Paid as a joining bonus, it often carries a clawback.
If the old employer recovers notice pay from your final salary under the contract, the Ahmedabad bench of the Income Tax Appellate Tribunal (Nandinho Rebello v DCIT, 2017) taxed only the salary actually received, so the reduction can offset the reimbursement.
If you pay from savings, the Income-tax Act has no specific deduction for it, and the Chennai bench (S.S.N. Ravi v ACIT, 2016) refused to cut taxable salary by a joining bonus repaid to a former employer and reimbursed by the new one. Each ruling turns on its facts and neither is a High Court ruling, so check how your old employer's Form 16 shows the recovery and ask a CA before filing.
Can the old employer deduct it from your final settlement?
Notice pay recovery is not among the deductions section 18 of the Code on Wages, 2019 lists, so a set-off under the contract is open to challenge, and the section's cap of 50% of wages in a wage period does not make it lawful. Half of Ritwik's ₹1,41,000 final month is ₹70,500, below either buyout; for paying wages the Code counts HRA and other allowances, though not the employer's PF. A buyout you agree to and pay by bank transfer is a contract payment instead. Full and final settlement covers what else comes off and when.
What else does an earlier last day change?
Your service ends on the actual relieving date, and so, usually, does your group health cover. If you would reach five years of service inside the days you buy out, the buyout can cost your gratuity under the five-year rule: ₹2,16,346 at a ₹75,000 basic. Some High Courts, under the 1972 Gratuity Act, counted 240 days in the fifth year (190 in a five-day week) as a full year; section 54 of the Code on Social Security, 2020 keeps the test, though no ruling has yet applied it, as gratuity before 5 years explains. Ritwik, at 3 years and 2 months, loses nothing there.
Dhi answers questions such as what a buyout leaves you after tax from your own numbers, alongside your cash flow, net worth, protection and goals. Dhi nudges you when something needs attention and earns no commissions.
Frequently asked questions
This is general information for salaried individuals in India, not personalised financial advice.
