Notice Period Buyout and Recovery in India: Formula, Rules

A notice period buyout is the amount an employee pays to be relieved before serving the full notice in the appointment letter. When the employer takes the same amount out of the full and final settlement, it is called notice period recovery. When the employer is the one cutting the notice short, it pays salary in lieu of notice instead. The usual formula is the daily rate of the salary named in the notice clause multiplied by the number of unserved days. No Central law fixes the notice period, the divisor or the pay heads for a resigning employee, so the appointment letter decides all three. Since 21 November 2025, the Code on Wages, 2019 controls how much of that amount can come out of final wages.

If you already know the shortfall and want the number, go to the buyout formula and the worked calculation, or put the dates into the notice period buyout calculator. If you are about to process the exit, read whether notice pay can be deducted from final wages before you run the settlement.

This is general guidance for employers and does not replace legal advice. It follows the Code on Wages, 2019, the Industrial Relations Code, 2020 and the Code on Social Security, 2020, all brought into force on 21 November 2025 by S.O. 5322(E), S.O. 5320(E) and S.O. 5319(E), along with the Indian Contract Act, 1872 and CBIC Circular 178/10/2022-GST. State shops and establishments laws and certified standing orders can add rules of their own. Law as on 4 November 2026.

What does notice period buyout mean, and how is it different from recovery?

A notice period buyout means the employee pays for the notice days they will not work so they can leave early. Recovery covers the same days, but the employer starts it. Both use the same formula.

• Buyout is employee-led. The employee asks to be relieved on an earlier date and offers to pay for the unserved days, usually because the new employer wants an early joining date.
• Recovery is employer-led. The employee stops coming before the notice ends, or the employer accepts an early exit, and the shortfall is adjusted in the full and final settlement.
• Waiver is the third outcome. The employer releases the employee early and charges nothing. Put the waiver in the relieving letter or acceptance email so nobody raises the amount later.

The reverse case also exists. When the employer ends the employment without letting the employee work out the notice, it pays wages in lieu of notice. That payment is called salary in lieu of notice, and section 8 covers it.

What are the notice period rules in India?

For most private-sector employees, the notice period comes from the appointment letter. No Central law, the Labour Codes included, prescribes a notice period for an employee who resigns.

The rule can come from four places, and the one that applies depends on the size of the establishment and the category of employee:

• Appointment letter or employment contract. This is the main source for managers, professionals and most office staff. Common periods are 30, 60 and 90 days, often with a shorter period during probation.
• Standing orders. Chapter IV of the Industrial Relations Code applies to industrial establishments with 300 or more workers (section 28). The First Schedule lists the matters standing orders must cover, and item 8 reads: "Termination of employment, and the notice thereof to be given by employer and workers." An establishment that adopts the Central model standing orders is treated as having certified standing orders (section 30(3)).
• State shops and establishments law. Your State's Act may set a notice requirement for termination. Check the current text before relying on any figure.
• IR Code section 70. This sets one month's notice, or wages in lieu, before a worker with at least one year of continuous service is retrenched. It binds the employer and says nothing about resignation.

The IR Code's definition of "worker" in section 2(zr) excludes people employed mainly in managerial or administrative roles, and supervisory staff earning more than ₹18,000 a month, so senior staff depend almost entirely on their contract.

How do you calculate a notice period buyout or recovery?

Multiply the daily rate by the number of unserved notice days. Every input in that formula comes from the notice clause, so read the clause before you open a spreadsheet.

Notice buyout or recovery = (monthly salary named in the clause ÷ divisor) × unserved notice days

Work through the inputs in this order:

• Notice start date. Count from the date the written resignation was received, unless the letter says notice runs from acceptance.
• Notice end date. Add the notice period to the start date in calendar days. A 60-day notice from 1 November ends on 30 December.
• Last working day. Use the agreed or actual last day the employee worked or was on approved leave.
• Unserved days. Count the calendar days from the day after the last working day to the notice end date. Weekly offs and holidays inside that window count, because the notice period itself is counted in calendar days.
• Salary base. Use the pay heads the clause names. "Basic salary", "gross salary" and "CTC" give very different answers.
• Divisor. Use what the clause or policy says. If it says nothing, 30 is the common choice and is what our notice period calculator uses.

The figure 26 comes from the gratuity formula, where Explanation 3 to section 53(2) of the Code on Social Security uses it to convert monthly wages to a daily rate. It does not carry over to notice recovery. Dividing by 26 while counting all calendar days in the shortfall inflates the recovery, because weekly offs are left out of the divisor but counted in the days. Keep the two consistent: either 30 with calendar days, or 26 with working days only.

Leave employer contributions, reimbursements and one-time items such as joining bonus out of the base unless the clause names them.

What does a worked notice buyout calculation look like?

Assumptions (example data):

• Monthly gross salary ₹60,000, of which basic is ₹30,000.
• Notice period of 60 days. The clause reads "gross salary for the unserved notice period", with a 30-day month.
• Resignation received on 1 October 2026. Notice ends on 29 November 2026.
• Agreed last working day 31 October 2026.
• No leave adjustment against notice.

The last row shows why the divisor matters. On one employee the gap between the basic-salary reading and the inconsistent 26-day method is ₹37,923. If your clause is unclear, settle on the reading you can defend in writing and use it for every exit.

This example counts the resignation date as day one. Some employers count from the next day, which moves the end date to 30 November, so write the counting rule into the policy.

Can an employer deduct notice pay from an employee's final wages?

An employer can net notice pay in the settlement, but it should not impose it as a wage deduction. Section 18(1) of the Code on Wages bars any deduction from wages except those the Code authorises, and the list in section 18(2) does not name notice shortfall.

The permitted deductions in section 18(2) include fines, absence from duty, damage to or loss of goods entrusted to the employee, house accommodation, amenities, recovery of advances and adjustment of wages overpaid, loans, income tax and other statutory levies, social security contributions, and a few others. Explanation (a) to section 18(1) adds that any payment made by an employee to the employer is deemed to be a deduction from wages.

Two provisions bear directly on notice:

• Section 20(2) proviso. Where 10 or more employees acting in concert absent themselves without the notice their contracts require and without reasonable cause, the deduction for absence may include an amount up to eight days' wages due to the employer in lieu of notice. This is the only place the Code expressly allows a notice-related deduction, and it applies to group walkouts.
• Section 18(3). Total deductions in a wage period cannot exceed 50% of the wages for that period. Any excess is recovered in the manner the Government prescribes (section 18(4)).

In practice, employers handle a single employee's shortfall in one of three ways:

• The employee asks for an early release in writing and agrees to the buyout amount before the last working day. The amount is then netted in the settlement with the employee's signed consent on file.
• The employer recovers from contractual payouts that sit outside "wages" as defined in section 2(y), such as a discretionary performance bonus whose policy makes payment conditional on serving notice.
• The employer waives the shortfall, often for junior staff where the amount is smaller than the cost of the dispute.

Our reading is that a unilateral recovery of notice pay from earned wages, without the employee's agreement, is open to challenge before the claims authority under section 45, which can award up to ten times the amount as compensation. Have your legal adviser review your exit policy against section 18 before relying on it.

Can a notice period shortfall be adjusted against gratuity?

No. Section 53(6) of the Code on Social Security allows gratuity to be withheld or forfeited only where services were terminated for specified misconduct.

The grounds are:

• any act, wilful omission or negligence causing damage or loss to, or destruction of, the employer's property, where gratuity is forfeited to the extent of the loss; or
• riotous or disorderly conduct or other violence, or an offence involving moral turpitude committed in the course of employment, where the gratuity can be forfeited wholly or partially.

A resignation without full notice is neither. Pay the gratuity in full within 30 days of it becoming payable under section 56(3), or interest becomes due under section 56(4). Recover any agreed buyout from other heads. The gratuity calculation guide and the gratuity calculator cover the payout itself.

Can earned leave be adjusted against the notice period?

Yes, if your leave policy or the appointment letter allows it. No Central statute requires or forbids the adjustment, so the written policy decides.

Employers usually follow one of these approaches:

• Leave counted as notice served. Approved earned leave during the notice period counts towards notice, so the employee leaves on the planned date with fewer days to encash.
• Leave balance offset against shortfall. Unused earned leave is set against unserved days at the same daily rate. The employee gets less encashment and pays no buyout.
• No leave during notice. The policy bars leave in the notice period except for medical reasons, and the full balance is encashed at exit.

Apply one approach to every exit and show it as a separate line in the settlement. The leave policy guide covers how to write the rule, and the leave encashment calculator gives the encashment value to set against the shortfall.

What is salary in lieu of notice, and when does the employer pay it?

Salary in lieu of notice is the pay an employer gives for notice it did not let the employee serve. It runs the other way from a buyout: the employer pays, and the employee leaves early. For a worker with at least one year of continuous service who is being retrenched, section 70 of the IR Code makes this a condition before retrenchment.

Section 70 requires all three of these before a retrenchment takes effect:

• one month's written notice giving the reasons, or wages for the notice period paid in lieu;
• retrenchment compensation of 15 days' average pay for every completed year of continuous service, or part of a year above six months; and
• notice to the appropriate Government or the authority it specifies, in the prescribed manner.

The retrenched worker also gets 15 days' wages last drawn credited from the re-skilling fund under section 83, within 45 days of retrenchment.

For employees outside the IR Code's "worker" definition, the contract governs. If the letter says either side can end the employment with 60 days' notice or salary in lieu, the employer pays 60 days' salary on the same base and divisor it would use to recover from the employee. Using gross for payments to the employee and basic for recoveries from them is hard to defend.

If the employee offered to serve the full notice and the employer chose to relieve them earlier, the employer cannot recover the unserved days. Whether it must pay for them depends on the letter.

Is a fixed buyout amount in the offer letter enforceable?

A fixed sum is enforceable only up to what is reasonable. Section 74 of the Indian Contract Act lets a party recover "reasonable compensation not exceeding the amount so named" when a contract fixes a sum payable on breach, so the stated figure works as a ceiling.

A clause that says "three months' gross salary in lieu of notice" for a 90-day notice period is easy to justify, because the amount tracks the days not served. A clause that charges a flat ₹2 lakh whatever the shortfall, or two months' pay for leaving one week early, is likely to be cut down to what is reasonable for the actual breach.

Keep the recovery proportional to unserved days, and put training bonds and joining bonus clawbacks in separate clauses with their own amounts.

Is GST or income tax payable on notice period recovery?

Employers generally do not charge GST on notice pay recovered from an employee. That practice rests on the reasoning in a CBIC circular, because no rule names notice pay. For income tax, the common payroll approach is to net the recovery before computing TDS, but the tax treatment of recovered notice pay has been decided differently in different cases, so confirm the position with a tax adviser.

GST. CBIC Circular 178/10/2022-GST dated 3 August 2022 deals with liquidated damages and similar payments. Paragraph 7.5 says that salary forfeited or a bond amount recovered when an employee leaves before the agreed minimum period is a penalty meant to deter premature quitting, and the employer does not receive it as consideration for tolerating the exit. The circular does not mention notice pay by name, but the usual practice is to apply the same reasoning to notice recovery and not charge GST on it. If your amounts are large, take a written opinion from your GST adviser.

Income tax for the employee leaving. The common payroll approach is to reduce the final month's taxable salary by the recovered amount and compute TDS under section 392 of the Income-tax Act, 2025 on the net figure, so the employee is not taxed on money they did not receive. The tax treatment of recovered notice pay has been decided differently in different cases, so confirm the position with a tax adviser before you publish the Form 16 figures.

Income tax on pay in lieu of notice from the employer. Wages paid by the employer for notice not given are salary in the employee's hands. Include them in the final month's salary for TDS, and reflect them in the employee's year-end TDS certificate. The Form 16 guide for employers explains the certificate.

How does notice recovery fit into the full and final settlement?

It is one deduction line in the settlement statement, shown against the earnings it is set off from, with the employee's written consent attached.

Section 17(2) of the Code on Wages requires wages to be paid within two working days of the employee's removal, dismissal, retrenchment or resignation. Plan the notice calculation before the last working day so this deadline does not slip.

A clean settlement statement for a short-notice exit has these lines:

In this example the recovery is about 97% of the final month's salary. Section 18(3) caps deductions at 50% of the wages for the wage period, which is another reason to settle a large buyout through the employee's own written request and agreed netting.

As a practice, pay on the last working day or the day after, so the two-working-day clock under section 17(2) does not slip. The full and final settlement guide covers every other head and the timelines for each.

What do employers ask most about notice period recovery?

Is it legal to recover notice pay from an employee in India?
Yes. An employer can recover pay for unserved notice if the appointment letter provides for it, but a deduction from earned wages must respect section 18 of the Code on Wages, so get the employee's written agreement to the netting.

Is the notice period the same for every employee under the Labour Codes?
No. The Codes do not fix a notice period for resignation. The appointment letter, standing orders or State shops law sets it.

Should a notice period buyout be calculated on basic or gross salary?
On whichever pay heads the notice clause names. A clause that says only "salary" is usually read as gross, but the offer letter can change that.

Is 26 days the correct divisor for notice recovery?
Not by default. The 26-day divisor comes from the gratuity formula. For notice, use the contract's divisor. If the contract is silent, the common practice is 30 days with calendar days counted. Use 26 only if you also count working days alone.

Can the employer refuse a buyout and insist on the full notice?
Yes. Unless the contract gives the employee a right to buy out, early release is the employer's choice. The employee can still resign, and the employer's remedy is recovery under the contract.

Can unpaid notice pay stop the relieving letter or experience letter?
No. Withholding documents to force payment invites a complaint and does not create a legal right to the money. Recover the amount through the settlement or a demand letter.

Is a notice period buyout deducted before tax?
The common payroll approach is yes: reduce the final month's taxable salary by the recovered amount and compute TDS on the net figure. Confirm with a tax adviser, because the treatment has been decided differently in different cases.

Is salary in lieu of notice taxable?
Yes. Salary paid in lieu of notice is salary in the employee's hands. Add it to the final month's salary and deduct TDS on the total.

What if an employee leaves without serving notice and refuses to pay?
Pay the final wages and gratuity that are due, then send a written demand for the shortfall under the contract. If the employee stops reporting without resigning, follow your absconding procedure before you process the exit.

Does an employee on probation have to serve notice?
Yes, if the appointment letter says so. Many letters set a shorter probation notice, often 15 days or none, and the same formula applies to the shortfall.

What should you check before recovering notice pay or accepting a buyout?

• The notice clause names the period, the salary base, the divisor and when notice starts.
• The resignation date is recorded from the written resignation, with the notice end date counted in calendar days.
• Any leave adjustment follows the written leave policy and is shown as its own line.
• The employee's buyout request or consent to the netting is signed and on file.
• Gratuity is paid in full, with no set-off for notice.
• Total deductions in the last wage period are within 50% of wages, or the balance is settled by agreement.
• TDS follows the tax adviser's confirmed position on netting the recovery against taxable salary.
• Final wages are paid within two working days of the exit date.
• Any amount the employer pays in lieu of notice uses the same base and divisor as recoveries.

The notice period calculator works out the shortfall and the buyout figure from the resignation date and the last working day. To run exits with notice recovery, leave and gratuity in the same settlement, use Engage payroll. See Engage pricing for plans.

Related reading: full and final settlement in India, gratuity calculation, CTC breakup, full and final settlement and absconding in the glossary.

Sources

• The Code on Wages, 2019 (Act No. 29 of 2019), Ministry of Labour and Employment PDF. Section 2(y) wages; section 17(2) payment on resignation; section 18 authorised deductions and 50% ceiling; section 20(2) proviso on concerted absence without notice; section 45 claims.
• The Industrial Relations Code, 2020 (Act No. 35 of 2020), Ministry of Labour and Employment PDF. Section 2(zr) worker; sections 28 to 30 standing orders; section 70 conditions before retrenchment; section 83 re-skilling fund; First Schedule item 8.
• The Code on Social Security, 2020 (Act No. 36 of 2020), Ministry of Labour and Employment PDF. Section 53(2) Explanation 3 on the 26-day divisor; section 53(6) forfeiture; section 56(3) and (4) payment and interest.
• S.O. 5319(E), S.O. 5320(E) and S.O. 5322(E), 21 November 2025. Commencement of the Code on Social Security, the Industrial Relations Code and the Code on Wages.
• Indian Contract Act, 1872, section 74. Compensation for breach where a sum is named in the contract.
• CBIC Circular No. 178/10/2022-GST, 3 August 2022. GST on liquidated damages; paragraph 7.5 on salary forfeiture and bond amounts when an employee leaves early.