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Signing Bonus Attractive enough?

Updated on: 21 Sep, 2023 10:20 AM

A signing bonus is an amount of money offered to a new employee by the employer company as an attractive incentive to join the company. Further, the signing bonus is generally conditional in nature, i.e. the employee has to stay in the organization for a specific period (say 1 year or 3 years or even 5 years) and in case the employee fails to do so, the employee is bound to return the amount of signing bonus back to the employer company.

We know, you might think who leaves a job if you have to return the amount! But in any case, or circumstance, if you have to, you should know the taxability of the signing bonus you are attracted to!

Generally, you would think if you have received an income and paid it back in the same year (i.e. the bonus you receive on joining and paying it back in case you leave before the defined period), then you won't be liable to pay tax on the same. But, it is to be noted that signing bonus is a part of your salary and no provision of the Income Tax Act provides for deducting the same from your salary income. The same was held by the ITAT in a recent judicial pronouncement in the case of Shri S.S.N Ravi v. The Assistant Commissioner of Income Tax, Salary Circle III, Chennai. So let's go through the facts of the said case.

Mr. Ravi, an individual assesse, worked with Barclays Bank from 01.04.2007 to 31.10.2007 and then joined Deutsche Bank. He filed his return for FY 2007-08 and disclosed a total salary income of Rs. 43,54,815/- from both the employers and claimed a refund of Rs 7,72,266/-.

Subsequently, the return of income was processed and the Assessing Officer based on the Form 16 issued by the employers found that Mr. Ravi's salary income is Rs. 68,54,815/- which is more than what he had submitted in his return (i.e. Rs. 43,54,815/-) and that he has not offered salary income of Rs. 25,00,000/- in his return of income.

But why he did not include Rs 25, 00,000/- in his salary at the time of filing of his return?

Barclays Bank had paid Ravi a taxable signing bonus of Rs. 25,00,000/- when he joined the company with a condition that if he leaves the company within a period of one year from the date of his joining, he shall refund the signing bonus back to Barclays. Later, Mr. Ravi left the organization and joined Deutsche Bank which offered him a higher salary and even reimbursed the loss of signing bonus of the earlier employer i.e. Barclays Bank. So, while filing the return of income for the relevant year, Mr. Ravi didn't include this amount of Rs. 25,00,000/- in the total salary income disclosed (i.e. income from Barclays Bank plus income from Deutsche Bank).

Hence, notice u/s148 of the Act was issued to Mr. Ravi and Rs. 25,00,000/- were added to the income of the assessee. Aggrieved by the order of Assessing Officer, Mr. Ravi filed an appeal before Commissioner of Income Tax (Appeals). Further, the appeal was dismissed by the CIT (Appeals) holding that the said amount was forfeited by him due to breach of contract on his part, with his employer and the same is liable to be included in the income earned by him. Aggrieved by the Commissioner of Income Tax (Appeals) order, Mr. Ravi filed an appeal before the Tribunal.

Finally, the Tribunal held that the characteristic of signing bonus is Revenue receipt and it cannot be considered as compensation of forfeited amount or additional premium prize. The assessee has received the amount during his employment and there exists employer and employee relationship and sign-in bonus cannot be treated as a capital receipt.

Thus, it was held that the amount of signing bonus is a part of income from salary and the same is not eligible for deduction in case of refunding it back to the employer. In case, if you are joining a new company or a new job and are lured to the attractive bonuses they offer, just think over its actual worth and go through this as a caution in case you leave the same for a better one!! And in case, you have any doubts or queries, feel free to contact us at [email protected] or call +91-9116684439!

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.