While monthly salary makes it easy to file income tax, any additional incentive such as sign-on bonus and its refund to the employer turns out to be a hassle.
Most employees who receive sign-on bonus may have the following questions in mind:
- Should sign-on bonus form part of my taxable salary if I have already returned it to the previous employer?
- Should I bear the tax on the bonus which has been returned or can I claim a refund of TDS on sign-on bonus?
Recently, case law was decided in the courts which deals with a question of tax implication of returning of a sign-on bonus. Let’s understand it in more detail.
Details of Case Law:
Case Law: Income Tax Appellate Tribunal – Chennai, S.S.N.Ravi, Chennai vs ACIT on 6 May 2016 I.T.A. No.933/Mds/2015. Assessment year: 2008-2009.
Facts of the case:
The taxpayer filed the income tax return for FY 2007-08 and disclosed a salary income of Rs.43,54,815. He had filed for a refund of Rs 7,72,266. However, the assessing officer (AO) found out that the taxpayer’s salary income was Rs.68,54,815 as per Form 16.
In the FY 2006-07 (the previous financial year), the taxpayer had joined Barclays on 20 November 2006. The taxpayer had received a sign-on bonus of Rs.25 lakh in FY 2006-07 from Barclays and included it in his income tax return for FY 2006-07. The sign-on bonus was given on the condition that if he leaves Barclays within one year of joining, he shall refund the sign-on bonus. The taxpayer left Barclays on 31 October 2007, i.e. before completing 1 year from the date sign-on bonus was received.
He, then, joined Deutsche Bank who reimbursed to him the sign-on bonus amount of Rs.25 lakhs. While filing IT returns for FY 2007-08, the taxpayer reduced the sign-on bonus he paid to Barclays from his taxable salary.
The AO added back Rs.25 lakh to the taxable salary for FY 2007-08. The tax authorities said that the Income Tax Act does not offer any details or explanation for the reduction of sign-on bonus which is refunded to the previous employer. (Section 17(1)).
The taxpayer has left the services of Barclays voluntarily and there was no termination of his employment. Deutsche Bank agreed to pay the sign-on bonus to the taxpayer so he can refund to Barclays.
The sign-on bonus cannot be considered as compensation by Deutsche Bank of the forfeited amount. It is a revenue receipt and not a capital receipt. ITAT decided that Rs.25 lakh, which was refunded to the previous employer and reimbursed by the current employer, cannot be reduced from taxable income.
Takeaways from the case law:
- Sign on bonus refunded to previous employer cannot be reduced from taxable salary.
- TDS is deducted on sign-on bonus by the employer while paying the sign-on bonus to the employee. However, at the time of returning this sign-on bonus, no refund of TDS can be claimed by the employee.
[Details of Case Law:
Case Law: Income Tax Appellate Tribunal – Chennai, S.S.N.Ravi, Chennai vs Assessee on 6 May 2016 I.T.A. No.933/Mds/2015. Assessment year: 2008-2009.]