An employee gives two weeks on a sixty-day clause. What are you owed, how do you compute it, and can you take it from the final settlement? Here is the arithmetic and the limits.
Notice period recovery (or buyout) is the amount an employee pays — usually by deduction from the final settlement — for the part of the contractual notice period they did not serve. It exists because the appointment letter says so; without a clause specifying the notice period and the recovery, there is nothing to recover. The usual formula is (monthly salary ÷ days in the month) × notice days short, with two decisions that change the number materially: whether "salary" is gross or basic, and whether days are calendar or working. The recovery can be set off against earned salary, leave encashment and other dues in full and final settlement, provided the clause permits it and statutory dues like gratuity are not touched. Facts checked 14 October 2026; state Shops and Establishments Acts set minimum notice in some states, so check yours.
Recovery = (monthly salary ÷ days in the month of leaving) × days of notice not served. "Monthly salary" is whatever the clause says. Suppose a 60-day notice clause and an employee on ₹60,000 gross (₹30,000 basic) who gives 15 days' notice and leaves on 30 September (30 days in the month):
| Gross, calendar days | ₹60,000 ÷ 30 × 45 = ₹90,000 |
|---|---|
| Basic, calendar days | ₹30,000 ÷ 30 × 45 = ₹45,000 |
| Gross, working days (26) | ₹60,000 ÷ 26 × (45 × 26/30 ≈ 39 working days) = ₹90,000 — the same answer when both numerator and denominator use the same convention; different answers appear when people mix them. |
The mixing error is the common one: dividing gross by 26 working days and multiplying by 45 calendar days gives ₹1,03,846 — more than the employee would have earned in the period, which is the number that gets challenged. Use the same divisor logic you use for loss of pay.
Under the Code on Wages, deductions from wages must be of permitted kinds and within the monthly limit; a recovery authorised in writing by the employee in the appointment letter is the cleanest footing. See payroll mistakes for what an unauthorised deduction costs.
When the employee's next employer pays the buyout, invoice it to the employee (who is reimbursed) or to the new employer, and record it as recovery of notice pay. Whether GST applies to notice pay recovery was litigated for years; the CBIC clarified in 2022 that amounts recovered from employees as notice pay are not consideration for a supply and not liable to GST. Keep the recovery labelled as such on the settlement.
Many policies allow earned leave to be set off against the notice shortfall — the employee's 12 days of balance reduce a 45-day shortfall to 33. This is a policy choice, not a right; the leave encashment rules you already have should say whether balance is encashed, adjusted against notice, or both at the employee's choice. Waiving notice entirely is also your call — write it down when you do, so the next person who asks gets the same answer.
Show it as a single named deduction: "Notice period recovery — 45 days × ₹2,000 = ₹90,000", against the earnings side (final-month salary, leave encashment, bonus). The settlement statement is the document that gets disputed, so the recovery line must show the days, the daily rate and the basis. See the F&F guide for the full statement structure and the gratuity rules for the line you may not touch.
| Basis | Appointment letter clause; no clause, no recovery |
|---|---|
| Formula | (monthly salary ÷ days in month) × notice days short |
| Gross or basic | As the clause states; use the same basis for pay in lieu when you release early |
| Set off against | Final-month salary, leave encashment, contractual bonus, reimbursements |
| Never against | Gratuity, PF or other statutory dues |
| GST | Not applicable on notice pay recovered from employees (CBIC clarification, 2022) |
| Leave adjustment | Policy choice; apply consistently |
Divide the monthly salary by the number of days in the month of leaving and multiply by the number of notice days not served. Whether 'salary' means gross or basic, and whether days are calendar or working, must come from the appointment letter clause; use the same convention in the numerator and denominator.
Yes, if the appointment letter provides for recovery of the shortfall and authorises deduction from dues. It can be set off against the final month's salary, leave encashment and other contractual dues, but not against gratuity or PF.
The balance is a debt the employee owes under the contract. In practice employers issue a demand and negotiate; the relieving letter is often conditional on settlement. Earned wages must still be paid within the timelines the labour-code rules set.
No. The CBIC clarified in 2022 that amounts recovered from employees as notice pay are not consideration for a taxable supply, so GST does not apply.
If your policy allows it. Many employers let the leave balance reduce the shortfall days, others encash leave and recover notice separately. Decide in the leave policy and apply the same rule to every exit.
Notice periods are contractual, subject to minimums in some state Shops and Establishments Acts. Long periods are enforceable only through recovery of pay in lieu, not by forcing the employee to work. A clause that lets the employer release with pay in lieu but recovers from the employee on a harsher basis is the kind that is read against the employer.
Merik holds the inputs the recovery needs: the employee's current salary structure and CTC history, their joining and exit dates, the leave balance at the time, and the stored payslips showing what has been paid. The final month's payroll is computed server-side from the attendance actually recorded, and the recovery goes on it as a labelled other deductions line next to loss of pay and professional tax, so the settlement statement and the final payslip agree.
Merik does not compute the recovery or decide the gross-versus-basic basis; that is your clause. See the employee and payroll modules.
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