Joining Bonus Retuned - Tax Implication

Executive Summary

Joining bonus often called as retention bonus or signing bonus or sign-on bonus is the component of salary paid by employer to employee at the time of joining the company. It serves as the incentive for employee to join the particular organization. However, in many cases such joining bonus paid is subject to the condition that such bonus will be claw back if the employee leaves the employer before completion of specified tenure, that is employee is required to return the joining bonus if he/she does not complete the specified lock-in period.

Joining bonus is included in the meaning of salary as per section 15 of the Income Tax Act, 1961 and liable for taxation just like any other component of salary. Therefore, employer makes the payment of joining bonus after making deduction of tax.

Now the question arises about the taxability of return of joining bonus when the employee resigned the organization before completion of specified tenure and as a result he repay the joining bonus to the employer.

This issue is discussed herein taking reference of below hypothetical example.

Example

Mr. X has joined ABC Ltd as the finance manger on 01.10.2022. CTC of Mr. X was Rs. 14 lakhs per annum which includes Rs 2 lakhs as joining bonus. As per the terms of appointment, Joining Bonus will be subject to claw back if Mr. X leave the organization before completion of 3 years. However, after completion of 1 years i.e on 01.10.2023, Mr. X leaves the organization and joined another company, wherein his CTC was fixed at Rs. 18 lakhs per annum. No other amount is paid by second company.

Now, since Mr. X leave the organization before completion of 2 years, he is required to refund the joining bonus.

(Note: Taxes have been calculated as per old regime and no other income and no other deductions are considered).

For the AY 2023-24, total income of Mr. X will be Rs 8 lakhs (Rs. 2 lakhs joining bonus and Rs. 6 lakhs other salary). He will be required to pay tax of Rs. 65,000.

Now for the purpose of calculation of tax liability of Mr. X for AY 2024-25 there can be two possible cases. In Case 1, his income will be computed on gross basis and in Case 2, refund of joining bonus is adjusted against the salary and net amount of salary is offered for taxation. Legality of both the cases will be discussed with reference to the rulings of Income Tax Appellate Tribunal.

Particulars	Case 1	Case 2
Income from 1st company	Rs. 6,00,000/-.	Rs. 6,00,000/-.
Less: Refund of Joining bonus		(Rs. 2,00,000/-.)
Net Income from Company 1	Rs. 6,00,000/-.	Rs. 4,00,000/-.
Income from 2nd company (Rs. 1.5 lakhs for 6 month)	Rs. 9,00,000/-.	Rs. 9,00,000/-.
Total Income	Rs. 15,00,000/-.	Rs. 13,00,000/-.
Income after standard deduction	Rs. 14,50,000/-.	Rs. 12,50,000/-.
Tax payable	Rs. 2,57,400/-.	Rs. 1,95,000/-.

SSN Ravi v. ACIT [IT Appeal no 933 (Mad.) of 2015] Chennai Tribunal – Case 1

Fact of the case

♦		Assessee was working with company 1 and received joining bonus from the same. The same was offered for taxation during the year of receipt i.e AY 2007-08.
♦		During the year under consideration AY 2008-09, assessee has left the 1st company and joined new company. The assessee has refunded the joining bonus to 1st company due to pre-mature termination of employment. However, the said amount was reimbursed by the 2nd company.
♦		Assessee while filing the return of income reduced the joining bonus returned to 1st company from the gross salary and declared salary on net basis for taxation.
♦		The case of the assessee was taken for assessment and assessing officer made the addition of joining bonus.

CIT(A)

CIT(A), first appellate authority did not admit the claim of assessee and made following observation.

"Since the said amount was forfeited by him due to breach of contract on his part, with his employer"

Decision of Tribunal

Honourable Tribunal has decided the matter in favour of revenue and made below observation

♦		"The sole issue is whether the provision of act permits deduction where assessee voluntary resigned from company 1 and joined company 2 violating the precondition of employment.
♦		The nature of sign on bonus is revenue receipt and it cannot be considered as compensation of forfeited amount or additional premium prize
♦		The assessee received the amount during his employment and there exist employer-employee relationship and sign on bonus cannot be treated as capital receipt.
♦		Also, assessee has voluntary resigned and there was no forced termination of employment.
♦		Assessee joined second company due to attractive pay and separate amount was provided for refund of sign on bonus
♦		There is no provision u/s. 17(1) which provides that assessee should reduce sign on bonus.

Vrajeshwari B Parekh v. ITO IT Appeal No. 1512 (Ahd.) of 2014 Ahmedabad Tribunal- Case 2

Facts of the case

♦		The assessee was the employee of Government of Gujarat and during the year under consideration salary of assessee was revised (a reduction in salary with retrospective effective) as a result of fixation of salary done by government of Gujarat.
♦		During the year under consideration, assessee has refunded the excess salary received from employer and shown the net amount in her return on Income. Form 16 issued by the employer also reflect net salary only.
♦		However, the assessing officer denied the claim of assessee and proposes to tax the salary at gross amount only.

Decision of Tribunal

Honorable Tribunal decided the case in the favor of the assessee after making following observations.

♦		Section 15(1)(a) provides for taxation of salary and it provides for taxability of income only when, and only to the extent the unqualified right to receive that salary, from the employer, has come into existence.
♦		If the assessee was entitled to receive only the net salary, net of recovery in respect of excess salaries received earlier, it cannot be said that the entire amount of salary, without such a recovery, was due to her. What was due to the assessee was the salary accrued during the year minus the excess salary received earlier
♦		The amount which constituted "salary due from an employer" was only the amount net of recovery, which the employer was legally empowered to make, in respect of excess payments made on account of wrong pay fixation

Note:

Even though the facts of decision of Ahmedabad Tribunal differ from the example taken, the rational taken by Honorable Bench may still be relevant. However if repayment of joining bonus is in nature of violation of terms of employment and paid on premature termination of employment, ruling of Chennai bench may be more relevant.

Conclusion

Taxability of Refund of joining bonus is one of grey areas for salaried individuals and Income Tax Act is also silent on this. In one case it can be considered as amount paid on violation of terms of employment and therefore provides that taxability should arise on gross basis only that is without adjusting the same.

There is another school of thought which emphasis that this amount can be adjusted against salary and tax would be payable on net basis. However there is no concrete ruling on this stand.

Assessee should carefully consider the facts of the case before taking any stand.

The article is the comprehensive analysis of decision of various appellate forums on the tax implication of return of joining bonus. This should not constitute any legal or professional advice in any manner whatsoever