Notice Pay Recovery
When an employee leaves before serving the full notice, the employer recovers basic salary for the shortfall days from the FnF.
What is Notice Pay Recovery?
Notice pay recovery happens when an employee resigns and does not serve the agreed notice period in the offer letter, usually 30, 60, or 90 days. The employer adjusts pay for the unserved days from the final settlement. The standard practice is per-day basic salary multiplied by the shortfall days, though some companies use gross or basic+DA. The recovered amount used to be taxable as salary in the employee's hands until the GST and service tax authorities raised disputes. Several tribunal rulings now treat notice recovery as not taxable as salary because the employee never received it. Employers should check their FnF tax handling policy. The recovery is shown as a deduction on the FnF statement.
Formula: Notice recovery = (Monthly basic / days in month) x Shortfall days
Example
Notice period 60 days, employee serves 40 days, shortfall 20 days. Basic ₹40K. Per-day = 40K/30 = ₹1,333. Notice recovery = 1,333 x 20 = ₹26,667 deducted from FnF.
How Notice Pay Recovery is used
Calculate notice shortfall during exit clearance. Apply the recovery in the FnF run. Make the formula visible on the FnF statement so the employee sees the calculation.
Notice Pay Recovery FAQs
Is notice pay recovery on basic or gross?
Most companies use basic. Some use gross or basic+DA. Check your offer letter.
Can the employer waive notice recovery?
Yes, by mutual agreement or if the new employer buys out the notice. Document the waiver in the relieving letter.
Is notice recovery tax-deductible?
Recent rulings say the recovered amount is not taxable as salary because it was never received by the employee. Tax handling varies, ask your CA.