What is the tax implication for retention bonus refunded? - Case Law

It is very common for people to change jobs due to various reasons. Many employees receive additional incentives in form of Sign on bonus at the time of joining the company which is added to the taxable salary of the employees and TDS is deducted on the same.

However, this bonus is generally provided with a condition for a period of employment which can vary from company to company. Now if the employee leaves the company before the completion of such period then they shall have to refund the money to the employer received as a Sign on bonus.

Usually, in such cases, the new employer pays for reimbursement of the amount received by the employee which they will then return to the previous employer.

Employees are of the view that since they are reimbursing the additional amount received from new employer to their previous employer it should not be taxed in the hands of employees and this receipt does not constitute income.

One such case was filed with the Income-tax appealte tribunal - S.S.N. Ravi, Chennai vs Assessee on 6th May 2016 I.T.A. No. 933/Mds/2015 for A.Y 2008-09.

Facts of the Case:

The assessee had filed ITR for A.Y 2008-09 in which they reported a salary of INR 43,54,815 and claimed a refund of INR 7,72,266/- which was processed by A.O. by adding 25 Lakhs to the taxable salary based on Form 16 issued by the employer. The assessee had changed jobs during the financial year.

The assessee had received a sign-on bonus of INR 25 Lakhs from M/s. Barclays Bank in FY 2006-07 on the condition that if he leaves the organisation without completion of one year from the date of joining then this amount shall be refunded to the employer. This bonus was reported as taxable salary in ITR filed by the assessee for A.Y 2007-08.

The assessee left Barclays without completing one year from the joining date and joined Deutsche Bank, who reimbursed them INR 25 Lakhs which was refunded to Barclays and while filing ITR for A.Y 2008-09 was reduced from the taxable salary by the assessee.

The decision for appeal:

The A.O. after considering the facts of the case was of the opinion that such a bonus is non-deductible from salary as there is no provision for such reduction u/s. 17(1) of the Income Tax Act and hence added it to the taxable salary of the assessee. Aggrieved of the order, the assessee filed an appeal before CIT (appeals).

CIT (appeals) was of the view that since the bonus was forfeited by the employer due to a breach of contract on the part of the assessee the same should be added to the taxable income. Aggrieved by this assessee filed an appeal before Tribunal.

The ITAT after considering the apparent facts, terms of employment, characteristics of sign-on bonus and the service certificate of Barclays Bank was of the opinion that they uphold the decision of CIT (appeals) since the assessee had voluntarily left the organisation and was not forced to terminate the employment. As per the Income tax act, there is no explanation for where the assessee should reduce the taxable salary due to refund of sign-on-bonus.

Key Takeaways from this case:

  • Sign-on bonus refunded to the previous employer can not be reduced from taxable salary.
  • Refund for TDS deducted by the previous employer at the time of returning the sign-on bonus can not be claimed.
1 Like

Hi,

I recieved a retention bonus of INR 10Lac from my company in two installments

  1. INR 5 Lacs in April 2019
  2. INR 5 Lacs in April 2020

With the clause that if I leave the company before April 2022 then I will have to return the comlete amount to the company.
I had to pay 30% tax on the two installments that I received in the respective financial years. So actually I received 3.5 Lacs in each of the two installments.
Now I am leaving the company in July 2021 and I have to return 10Lacs to the company as per the clause.

But how do I claim the tax of amount 3 Lacs on this 10Lacs that I paid to the Income tax department. Is there any way I can do that?

Thanks in advance.

Experts please helpā€¦

@AkashJhaveri @Saad_C @Laxmi_Navlani @Divya_Singhvi @Kaushal_Soni can you help?

Hi,
I had got the Retention bonus of 2,00,000 Rs on Jan 2021 for One Year. I.e. if leave the company before 1 year need to return it. I left the company in July 2021 and Bonus amount was deducted from my Gratuity and Leave Encashment. Since now the amount is Returned to the company how to claim the refund for it? I had file ITR 3 return Last year through Quicko, Planning to do same this year also. But donā€™t know how to claim it back. Can someone guide me for it?
Thanks!

I am also in same situation. I had got 2,00,000 retention bonus for one year in Jan2021 and tax was deducted from it.Now i left the company and bonus amount was deducted from my Graduity and Leave encashment.
Now i want to claim income tax refund deducted from the the bonus amount while filing return.

Hello @sahil,

If retention bonus has already been subjected to TDS at the time of disbursement and later it has been refunded to the employer when you leave and employer does not considers it in Form 16 then there is no way to claim refund later.

Whatever effect is given in your Form 16 by the employer same will be followed in ITR as well.

Hope this helps!

Hi @Bharti_Vasvani,
Thank you for your help on this topic.

Iā€™m exactly in the same situation as @Vipu0303.

On this topic, I heard that there was a judgement from ITAT Ahmedabad last year (2021) that - if the employer has recovered part of salary compensation/bonus, then the taxable amount under ā€œSalaryā€ should be on the ā€œtotal compensation - total recovered salary/bonusā€.

Do you have any information on this? Can you please share your inputs here?

Thanks in advance.

The assessee has refunded the excess amount of salary to the company and filed
revised return of income showing the actual amount of salary received as
approved by the Ministry of Corporate Affairs, Govt. of India. However, the
Assessing Officer has taxed the excess amount as salary income on the
ground that the amount was received by the assessee. The ld. CIT(A) has
deleted the addition holding that refund of salary by the assessee was not
voluntary but was to comply with the legal requirements of law, therefore,
the same cannot be considered as income assessable to tax.

Please share your comments on this judgement by ITAT.
Based on this judgment, can we also remove the refunded amount from salary, so that total taxable income will be based on actual salary received from the employer?

Thanks.

Hello @sam,

In the above case law referred by you, the taxable salary was reduced in order to meet the compliance requirements as per the law whereas the retention bonus is refunded by the individual to the previous employer for voluntary breach of contract.

Hence based on this case law assessee can not reduce the taxable salary by the retention bonus refunded.

Hope this helps!

@sam
are u sure you that there was a judgement from ITAT Ahmedabad last year (2021) ?
can u please share ITAT link if u have?

I am also in similar situation as you and @Vipu0303 .
It will beneficial for the entire community how u handled this case?

Thanks in advance.

@Bharti_Vasvani
i guess there no employer will report the amount of taxable Salary after deducting the recovered bonus amount at the time of filing TDS return.
As not doing above will help them in saving corporate tax on that amount as they showed that amount as expense but in reality that amount they didnā€™t gave to employee.

Can you please provide if there is any alternative solution for this issue?

Hello @Abhishek_gupta,

As per section 43 B of the income tax act expense of salary/ bonus can be claimed only of the amount actually paid or it shall be disallowed. However, the onus is on taxpayers to report correct details in the TDS returns and ITR as well.

Hi @Bharti_Vasvani

I joined company in May 2022 and resigned in Oct 2022 due to shifting but did not join anywhere. I have received the joining bonus and I returned it also while leaving. I did not receive the Oct salary instead I paid the amount to return the joining bonus.
In ā€˜form 16ā€™ there is no mention of returning the bonus amount. How can I claim it in ITR? As I did not join another company and if did not get returns then its my loss

Requesting you to help me

Thank you!

Hi @Mamata_N

As stated by @Bharti_Vasvani Sign-on bonus refunded to the previous employer can not be reduced from taxable salary.

So, if there is no mention of the return of bonus in your form 16, the same cannot be deducted from your taxable salary.

@Shrutika_Shah Thank you so much for reply!
What should be my next step? Should I fill ITR without any mention of returning the bonus to employer?
I worked only for 6 months in this financial year

Hi @Mamata_N

You canā€™t deduct the same from your salary. You will have to pay tax on the bonus.

In case you want expert assistance with your taxes, you can book a MEET for filing your return or Ask an Expert.