The arithmetic behind a notice period buyout is simple, your per-day salary rate multiplied by the days you will not serve. What actually trips people up is the tax treatment, which changes depending on who is writing the check, a detail most employees only discover after the money has already changed hands.
If your employer waives the remaining notice and pays you in lieu of it, that payment is taxed as regular salary in the month you receive it, and depending on your employer’s specific policy, provident fund contributions may apply to it as well, since it is treated as salary rather than a separate one-off payment. If you are the one paying to leave early, that cost comes straight out of your own pocket with no tax deduction available against it under the Income Tax Act, a genuine expense with no offsetting relief. If your new employer is reimbursing the buyout as a joining incentive, that reimbursement is fully taxable as salary or a perquisite in your hands even though the money is effectively just passing through you to your old employer, which catches a lot of candidates off guard since it does not intuitively feel like personal income.
One more detail worth knowing: GST does not apply to an employer-side notice period buyout, since it is treated as compensation for breach of contract rather than a taxable supply of service, per CBIC’s own clarification on the matter.
Most employment contracts specify Basic plus Dearness Allowance, or sometimes gross salary, as the reference for notice pay calculations, not the full CTC figure which includes employer-side contributions you never actually receive as cash. Check your specific contract wording.
Often, yes. Many employers will agree to a partial notice waiver rather than a full one if business needs allow it, particularly if you offer a reasonable handover period. This is a negotiation, not a fixed formula.
Commonly yes, especially if they are reimbursing it, since they need it for their own payroll tax treatment and often require your relieving letter or a buyout confirmation from your previous employer.
Once you know which of the three tax scenarios applies, run the resulting taxable amount through our Income Tax Calculator or TDS on Salary Calculator to estimate the actual tax hit, and see our full notice period guide for the underlying legal sourcing behind each scenario.