Quick answer: A notice period buyout is a payment that lets an employee leave before serving the full notice in their contract. The employee, or more often the new employer, pays the old employer for the unserved days. In India the amount a new employer reimburses is taxable as salary, while the old employer’s recovery attracts no GST under CBIC Circular 178/10/2022-GST.
- Managers, and supervisors earning over ₹18,000 a month, sit outside the IR Code’s “worker” definition, so their notice terms come from the contract.
- A buyout reimbursed by the new employer is taxable salary, with TDS under section 392 of the Income-tax Act, 2025.
- CBIC Circular 178/10/2022-GST of 3 August 2022 treats forfeited salary and bond amounts recovered from a leaver as not taxable, and courts apply it to notice pay.
- Final wages are due within two working days of exit under the Code on Wages, so the shortfall is usually netted there.
How does a notice period buyout work?
Three parties settle one number: the value of the unserved days.
The old employer values the shortfall at its policy rate, on basic or on gross, and recovers it from the full and final settlement or as a direct payment. Then it issues the relieving letter.
Agreement is not automatic. An employer can insist on the full notice period.
Courts have backed such refusals. In Bharat Aviation v Rahul Soni (2026), the Bombay High Court said an employer that reasonably refused a resignation breaching a training bond need not issue a relieving letter. CMS IndusLaw’s May-June 2026 newsletter covers the ruling.
What does a buyout really cost the new employer?
More than the shortfall, if the hire is to break even after tax.
Let’s say you hire a Bengaluru engineer on ₹2,40,000 a month gross. She has 90 days’ notice. Her employer releases her after 30 days and recovers the other two months on gross pay.
| Item | Amount |
|---|---|
| Shortfall recovered by the old employer (2 months) | ₹4,80,000 |
| Tax if you reimburse ₹4,80,000 (30% plus 4% cess) | ₹1,49,760 |
| What she keeps from that reimbursement | ₹3,30,240 |
| Gross-up needed to leave her ₹4,80,000 | ₹6,97,674 |
Her yearly pay of ₹28.8 lakh already sits in the 30% slab of the new regime, and the total stays under the ₹50 lakh surcharge line.
So a full gross-up costs you about 45% more than the shortfall itself.
Many teams cap the reimbursement and pay it as a joining bonus instead. Either way, an unpaid buyout is a common trigger for offer dropout.
Who pays the buyout when you hire through an EOR?
The EOR pays it through payroll and bills you.
As the legal employer, the EOR adds the reimbursement to salary, deducts TDS and reports it in the quarterly TDS statement. You approve the amount and any clawback before the offer goes out.
Watch that clawback wording. Under section 74 of the Indian Contract Act, 1872, a court awards only reasonable compensation, capped at the sum the contract names.
How does Remunance handle notice period buyouts for new hires?
Remunance pays approved buyout reimbursements through Indian payroll, deducts TDS and passes the amount to you at cost, on top of a flat fee from USD 99 per employee per month. Our EOR cost calculator for India shows the monthly cost first.
The exit side sits in our guide to termination of employment in India. To price a buyout into your next offer, get a costed offer from our India team.
What else do people ask about notice buyouts?
Is a notice period buyout taxable?
Yes, for the employee. A reimbursement from the new employer is taxed as salary, with TDS deducted through payroll in the month it is paid.
Is GST charged on notice pay recovery?
No. CBIC treats notice pay and bond amounts recovered from departing staff as penalties, not consideration. The Gujarat High Court applied that view in Aculife Health Care v Union of India on 9 January 2025 and ordered a refund.
Can the old employer refuse a buyout?
Yes. A buyout needs both sides to agree. If it refuses, the employee serves the contractual notice or negotiates a shorter release with partial recovery.