Employees can claim refund of the TDS deducted but due to lack of clarity in the income tax act, it may lead to litigations. The TDS deducted by the employer will be visible in the Form26AS of the employee. If you leave your job without serving full notice period, get ready for a double whammy. Besides the notice period pay cut, your existing employer will also deduct TDS (tax deducted on source) on your full month’s salary. This is because under the Income Tax Act, salary income is taxable on a due basis or receipt basis, whichever is earlier. So, even if you haven’t received the salary for unserved notice period, you will have to pay income tax on it.
However, it is generally seen that the Income-tax authorities do not consider such deduction and seek to tax the entire salary due in the hands of the employee (i.e. salary before allowing for such deduction). There is no provision under the Income-tax Act, 1961 to allow deduction of notice pay forfeited by the employer when an assessee-employee leaves his job, without serving during notice period. In the case of NandinhoRebello v. DCIT  80 taxmann.com 297 (Ahmedabad – Trib.),the Tribunal also held that only actual salary received by an employee shall be taxed in his hands. It is a rational decision by the Tribunal as an individual should only be taxed on the amount he has actually earned and received.
Thus, depending upon the facts and circumstances of each case, a taxpayer may take reliance on this ruling and claim a refund in case tax has been deducted by the employer on the full salary in lieu of the notice period. That said, the possibility of tax authorities disputing such interpretation cannot be ruled out. To avoid any further litigation, Section 16 must be amended to allow deduction of noticepay. Also, in case the new employer buys out the unserved notice period with the erstwhile employer and pays a lumpsum amount upfont, the same would be fully taxable in the hands of the employee on which new employer should deduct TDS.