Notice period in India: rules, recovery and buyout

Notice period is the most argued-about clause in Indian employment, and the arguments happen because both sides assume a national rule exists. It does not. The notice period is a term of the contract, bounded by a patchwork of state law, and most of what is "known" about it is company practice. This guide covers where the rules actually come from, how to compute recovery, and the decisions an employer has to make when someone wants out early.

Where the rules come from

The employment contract sets the notice period. If the contract is silent, the state's Shops and Establishments Act fills the gap for employees it covers, typically with 30 days for anyone past probation, and some states with shorter periods for shorter service.
State Shops and Establishments Acts also set a floor the employer must give when terminating, and in many states a floor the employee must give when resigning. A contract can require more than the floor; it cannot require less of the employer.
The Industrial Relations Code 2020 governs workmen, broadly non-managerial staff. For them, termination without a valid reason or without notice and compensation is retrenchment, with its own rules.
Probation usually carries a shorter notice, often 7 to 15 days, which is why the probation clause and the notice clause need to be read together.

Typical practice: 30 days for junior and mid-level staff, 60 days for senior roles, 90 days in IT services and for leadership. Anything above 90 days is hard to enforce in practice and increasingly hard to hire against.

Notice pay recovery

If an employee leaves before serving the full notice, the contract usually allows the employer to recover pay for the shortfall. This is the clause that must be in writing; without it, recovery has no basis.

Recovery = shortfall days × daily rate, where the daily rate is monthly pay ÷ 30 (or 26, if the contract says so) and "pay" is whatever the contract specifies: basic, basic plus DA, or gross. Say which. A contract that says "one month's salary" without defining salary will be read against the employer.

Worked example. Notice is 60 days, the employee serves 35, so the shortfall is 25 days. Monthly gross is ₹60,000 and the contract recovers on gross with a divisor of 30. Daily rate is ₹2,000 and recovery is ₹50,000. If the contract recovers on basic of ₹24,000, recovery is ₹20,000.

Recovery is set off against the full and final settlement. If the F&F is smaller than the recovery, the employer can ask for the balance, but suing an ex-employee for ₹20,000 is rarely worth it; most companies withhold the relieving letter until it is settled, which has its own reputational cost.

No GST. CBIC Circular 178/10/2022 of 3 August 2022 clarified that notice pay recovery is not consideration for a supply; it is compensation for breach of contract, and GST does not apply. Companies that charged GST on recovery before 2022 can stop, and employees who were charged it have grounds to ask for it back. Show recovery on the F&F as a deduction, not as an invoice.

The employee cannot deduct notice pay recovery from their taxable salary either; tax applies on the salary earned, not on what was netted off.

Buyout and waiver

Three situations and three different answers:

Buyout by the employee. The employee asks to pay for unserved notice and leave early. It is the employer's decision, not the employee's right, unless the contract makes it one. Grant it when knowledge transfer is complete and the role is covered; decline it during a release or when the person holds unique context. Decide within a week of the request, in writing.
Buyout by the new employer. The joining company offers to reimburse notice pay. It does not change anything on your side; the employee still owes the recovery and you still decide whether to release early. Issue the recovery computation in writing because the new employer will ask for it.
Waiver. The employer releases the employee early without recovery. Common when the exit is amicable and the role is already backfilled. Record it as a waiver in the exit file so the next HR person does not ask why the F&F shows no recovery.

Garden leave, where the employee is paid but asked not to work during notice, is the employer's call and must be paid in full. It is useful for sales and senior roles leaving for competitors, and expensive for everyone else.

The reverse case: the employer terminates without notice. Then the employer pays notice pay in lieu, on the same base, in the F&F. Under the Code on Wages, wages due on termination or resignation must be paid within two working days.

Absconding employees

Someone stops coming to work and stops answering. The sequence that holds up later:

First letter after three to five consecutive unexplained absences, by email and registered post to the address on file, asking the employee to report or explain within seven days.
Second letter after that period lapses, stating that continued absence will be treated as abandonment of service and the employment will be terminated on a named date.
Termination letter on that date, with the F&F computed, notice recovery applied, and dues paid to the bank account on file. Mark the exit as abandonment, not resignation.

Do not withhold statutory dues like earned wages and gratuity as leverage; they are owed regardless. What you may withhold is the relieving letter and the experience letter until recovery is settled, and your policy should say so.

What goes in the F&F

The settlement sheet for an early exit should show, line by line: wages to the last working day, leave encashment, reimbursements, any bonus or incentive due, gratuity if eligible, notice pay in lieu if the employer is paying it, then deductions: notice recovery, asset recovery, advances, and TDS. One sheet, with the working, shared before payment.

Sources

This article describes general legal provisions and common practice, not legal advice. Notice period rules depend on your contract, the state Shops and Establishments Act applicable to your establishment and the employee's status under the Industrial Relations Code; confirm specifics with a professional.