Buy Out Notice Period - How Does Notice Period Buy Out Work?

The Human Resources (HR) Department manages an employee's resignation process. An HR needs to take care of many aspects of this process, such as stay interview, full and Final (F&F) settlement process, notice period, experience certificate, etc. 

These aspects of the resignation process are mandated by law and are also helpful in conducting a swift and systematic employee exit. Read this blog post to learn about buy out notice period meaning and how to buy out notice period in a company.

Buy out notice period meaning

When an employee resigns from a company, they must serve a notice period that can last from a few weeks to a few months. Suppose the employee cannot serve the notice period (in case of urgent onboarding with another company, early joining to a university, or any other reason); in that case, they can opt for buying out the notice period. 

This enables the employees to avoid working in the notice period by paying back the salary for the days they cannot work.

The HR department manages the entire buy out process, and the amount to buy out the notice period is generally calculated using the employee's gross salary.

Check: Gratuity calculator

How to buy out notice period?

You can navigate the following steps to buy out your notice period with your company:

1. Negotiate the exact duration of the notice period and the buy out option with the HR department. 
2. Find out the exact amount to be paid to the company to buy out the notice period for immediate release.
3. You can pay the amount or adjust it in the full and final (F&F) settlement to be relieved immediately. 
4. If your future employer has agreed to buy out your notice period, you can communicate the terms of buy out to your future employer. Then, they will pay all the remaining dues and settle your account with your previous employer.
5. Once the payment is made, and the previous company has acknowledged it, the company will provide you with the relieving letter, experience certificate, and other necessary documents to facilitate a smooth onboarding process with your future employer.

FnF meaning

FnF stands for "Full and Final Settlement". It means the final settlement of any financial or administrative matters when an employee leaves the organization, including unpaid salary, benefits, and any other outstanding payments/reimbursements, encashment of leaves. After FnF is processed, the organization doesn't owe the employee anything.

Check: Full and final settlement calculator

Notice period buyout laws India

There is no specific law in India that mandates or regulates notice period buyouts. However, if the terms of the buyout are mentioned in the employment contract and agreed upon by both the employer and the employee, then it becomes legally binding.

However, in some cases, employers may unreasonably deny a buyout request even when the contract allows it. Employees have a few options in such scenarios:

• Review the employment contract: Carefully check if the buyout clause is explicitly included. If yes, the employer is obligated to honor it.
• Engage in negotiation: Before taking legal action, try to negotiate with HR or management for a fair resolution, especially if urgent onboarding with a new employer is required.

It is important for both the employer and the employee to understand the terms and conditions of the notice period buyout before agreeing to it. In case of any disputes, they can approach the labor court for resolution.

Is notice period buyout taxable?

Yes, a notice period buyout in India is generally considered taxable depending on who initiates the buyout and under what circumstances. 

Here's a breakdown:

Scenario 1: Employer pays for the buyout:

• Employee: This amount is considered income for the employee and is taxable under the head of "Salaries." The employer will deduct TDS (Tax Deducted at Source) before disbursing the amount to you.
• Employer: The amount paid for the buyout is included as a business expense in their tax calculations.

Scenario 2: Employee pays for the buyout:

• Employee: The amount paid to the employer is not deductible from your taxable income.

However, there are some exceptions:

• Some specific industries might have different tax treatments for notice period buyouts. It's crucial to consult a tax professional specializing in your industry for specific guidance.
• There might be specific rules applicable to government employees regarding the taxability of notice period buyouts. Consult your departmental HR or a tax professional familiar with government employee regulations.

Additional factors to consider:

• You can negotiate with your employer whether taxes will be included in the buyout amount or deducted separately.
• Ensure you have clear documentation of the agreement and purpose of the buyout payment for future reference and potential tax disputes.

Remember, tax laws are complex and subject to change, so it's always best to consult a qualified tax professional for personalized advice regarding your specific situation and the tax implications of your notice period buyout.

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Notice period buy out amount calculation

Every organization can have a policy of its own to address notice period buyout amount calculation. It is according to the notice period/ termination policy the amount is calculated.

How is notice period buy out calculated?

Check your offer letter for the clause that mentions about how much to be paid to buy out notice period. Generally there are two ways this is done

Notice Buyout Calculation formula: Notice Buyout Amount = Daily Salary × Remaining Notice Days.

Based on the number of days employees want to cut off in notice period, an equivalent amount will be asked to pay

If an employee wants to buy out notice period, the necessary charges are cut in the salary and then the full and final settlement is done. The charges that are cut can be on the basic salary or gross salary. This will be mentioned in the offer letter.

Example: Anand's notice period is 3 months. According to the company policy when employees want to buy out it will becharged on the basic salary. However, he wants to buy out one month. Anand's basic salary is Rs. 20,000/month. He should get Rs. 60000 of basic salary + whatever other things that are mentioned in the CTC when the F&F is done. However, as he wants to buy out one month, he will get only Rs 40000 from the basic salary.

Some companies won't offer buying out some days of notice period and only allow full buying out.

There is a fixed amount that employees have to pay if they have to buy out notice period.

Some companies, mostly enterprises, mention in the offer letter how much should an employee pay when they want to buy out notice period. It could be one month salary or a fixed amount like Rs 1 lac or anything the company decides.

If an employee pays a certain amount to buy out notice period, they can produce the F&F documents to the new joining company and get the amount reimbursed as a joining bonus.

Ways to negotiate notice period with employees

Some other ways to leave the company without serving the notice period or shortening the length of the notice period are as follows:

• If employees have unused paid leaves from their tenure, they can use it to negotiate their notice period.
• If you have a good working relationship with your manager and the HR department, you might be able to shorten your notice period depending on your position and the nature of your work.
• Managers are generally hesitant to let go of an employee until a proper replacement is found and knowledge transfer is completed. You can try to be proactive in these processes and negotiate an early release.
• In some cases, companies tend to relieve the exiting employees immediately after their resignation or dismissal. The employee will still have a notice period and be active on the payroll, but the company will relieve the exiting employee of their duties. This is known as Garden Leave and is generally done to maintain confidentiality and protect sensitive information. This is often seen in cases where a competitor recruits the exiting employee.

Recent trends in notice period buyouts

In the past, many companies in India followed long notice periods often up to 3 months for critical roles. However, recent workplace trends have led to a shift in these practices:

• Shorter notice periods: To reduce buyout complications and prevent delays in onboarding, several organizations are now moving towards 1-month notice periods instead of 2–3 months. This not only makes the exit smoother but also helps attract talent faster.
  
  
• The “Great Resignation” effect: The wave of mass resignations globally has pushed employers to rethink rigid exit policies. Flexible notice periods and buyout options are now seen as part of employer branding, showing that the company values employee convenience and career growth.
  
  
• Competitive hiring markets: Startups and fast-scaling businesses, especially in tech, often prefer shorter or negotiable notice periods to onboard talent quickly and reduce dropouts during long waiting times.
  
  

These shifts indicate that notice period policies are no longer just about protecting company interests, they are becoming a key part of an organization’s employee experience strategy.

Conclusion

The HR department should prepare themselves in advance to facilitate the exiting process of an employee from a company. Notice Period is an essential aspect of the exiting process. It can be defined as the number of days the employees must work for the company before resigning. 

The notice period enables the employees to complete their pending work and provides sufficient time for the employer to find a suitable replacement for the exiting employee. Candidates are also asked to specify the notice period for job applications by future employers.

In case the employees cannot serve the notice period, they can buy out notice period by paying the equivalent amount of their salary for the days that they are not working during the notice period.

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