Shajini Surprise

A joining bonus letter usually carries one clause: leave inside the bond period and the unearned share comes out of your last salary. Employers recover it gross. You were taxed on it the year it landed. That mismatch is the joining bonus clawback problem, and since 24 February 2026 a tribunal order sits on your side.

Can you claim tax back after a joining bonus clawback?

Yes, on one recent tribunal order: ITAT Delhi held on 24 February 2026 that bonus money an employer recovers from your salary is not income you earned, so the deduction is allowed in the year of recovery.

The case is Shriram Bagavathyappan v DCIT (ITA 4815/Del/2025, assessment year 2018-19). A salaried employee was paid a ₹15 lakh joining bonus in 2015-16 and a ₹10 lakh retention bonus in 2016-17, both taxed when paid. He resigned in May 2017. The employer recovered ₹7.5 lakh of the first bonus and all of the second from his 2017-18 salary, and he offered only the salary left over. The officer added the full ₹17.5 lakh back. It stood through the order of 28 June 2021 and the first appeal.

The Tribunal called the add-back an "arbitrary, colourable exercise of power" and said the department should tax income actually earned. It cites no provision granting the deduction, so the logic is clean and the law is thin. ITAT Ahmedabad took the same line in Nandinho Rebello (18 April 2017), taxing only salary received, as our notice period buyout piece explains.

Four numbers show what the fight costs. Three read straight off the order; the fourth is our own division of the demand by the repayment.

Your slab, not the bonus size, sets what an add-back costs, so multiply what you repaid by your slab for the tax at stake. Whether you owe the repayment at all is a separate fight, covered in the proof problem in an employment bond.

What should you do when your employer recovers the bonus?

Start with three checks: what your Form 16 shows, which year the money went back, and whether the recovery matches your contract. Each points to one action in the table below.

Advice so far has been stricter. A poster on the Blind employee forum wrote in August 2022 that a bonus returned two years later was missing from Form 16, and replies mostly said a later-year repayment cannot reduce income. An undated Moneylife answer found no specific provision for it. These are reader accounts, not statistics, and the 2026 order cuts against them.

The first two rows hold the money. In the Delhi case the paperwork showed gross pay and the return showed net, and that gap was the whole dispute.

Worked example: assume a ₹3,00,000 joining bonus on a 24-month bond, 9 months served, pro-rata recovery and a 31.2% marginal rate in both years (30% slab plus 4% cess). Unserved share: 24 minus 9 is 15 months of 24, so you repay ₹1,87,500. You were taxed ₹93,600 and kept ₹2,06,400. After repaying, ₹18,900 is left if the tax stays put. Deduct the repayment and tax applies only to ₹1,12,500, leaving ₹77,400. The gap, ₹58,500, is the tax at stake. Try your own bond below; it takes under a minute.

Why can a bonus repayment claim still fail?

Because the order binds only the parties to it and names no section granting the deduction, an officer elsewhere can still add the repayment back and leave you to appeal.

The repayment itself can be enforced. In Vijaya Bank v Narnaware (14 May 2025) the Supreme Court upheld ₹2 lakh of liquidated damages under a three-year bond as not disproportionate, so expect to repay and argue about the tax. Recoveries often come out of the full and final settlement, so read yours beside what you are owed, such as leave encashment (or, more precisely, what your policy pays per day).

Then there is the invoice. Paragraph 7.5 of CBIC Circular 178/10/2022-GST (3 August 2022) says amounts recovered on "forfeiture of salary or recovery of bond amount" are not consideration for a service. It does not name joining or retention bonuses; a Tax Management India note of 10 July 2024 applies the same reading to them. Treat that as a strong argument, not a ruling.

• Check what your employer reported on the income tax portal (Form 26AS or AIS) before filing; if it shows the gross bonus, ask a CA how to present the deduction.
• Your clause may allow full recovery, not pro-rata. Contract Act s.74 allows only reasonable compensation up to the sum named.
• In the Delhi case the employer cut the recovery from salary; a cheque repaid after exit differs on its facts.

The decision is to claim the deduction in the year you repay, with a chartered accountant, before you file. This week, ask HR for Form 16 net of the recovery and the working behind the amount. This is wrong if you repay in the same year the bonus was taxed, or if the tax at stake is below a CA's fee, so check Form 16 Part B first.

The clause sits near the end of most Indian IT offer letters: leave before your notice period ends and you pay your salary for the days you skip. That payment is a notice period buyout, and some exit bills now add a second line under it: 18% GST. The tax department said so in August 2022, and two High Courts have since agreed.

Is GST applicable on notice period buyout?

No, GST does not apply to salary you pay back for skipping notice, because CBIC Circular 178/10/2022-GST treats it as a penalty that buys the employee nothing, so it is not consideration for any supply. Read the circular itself: paragraph 7.5 never says "notice period". It covers "forfeiture of salary" when an employee leaves before the agreed period, adding that the employee "does not get anything in return".

The Kerala High Court read notice pay into that line in Manappuram Finance (2022), as reported by Taxmann, and called the circular clarificatory, so it reaches exits before August 2022 too. The same paragraph covers an employment bond's proof problem.

The 18% line mostly traces to one Gujarat case. Amneal Pharmaceuticals' advance ruling, reported in November 2021, held GST payable. Its appeal split between the two members on 9 February 2022, and under CGST Act s.101(3) a split means no ruling issues. An HR policy citing Amneal cites nothing.

The practice outlived the law. An undated complaint on Medium says an employer "recovered the Notice period shortfall amount with 18% GST".

Four numbers set how hard you can push. They come from the Gujarat High Court's 2025 Aculife Health Care ruling (TaxGuru's report), the Model Standing Orders notified on 8 May 2026 (JSA's reading) and Code on Wages s.18.

The refund card is a warning. Aculife paid the tax itself, and the court held it was never tax, with the two-year refund clock running from 3 August 2022. On that reading, pre-circular claims shut on 3 August 2024 (our arithmetic), so refuse GST at the bill. If your buyout runs on basic pay, see how the Code on Wages add-back reshaped basic pay.

What each line of a buyout bill should say

A correct buyout bill shows one line, the contract formula applied to the days you did not serve after leave set-off, with no GST, and your Form 16 should then show only the salary you kept. In Nandinho Rebello v. DCIT (18 April 2017), ITAT Ahmedabad taxed only the salary actually received after ₹2,76,744 of notice pay was held back, per BCAJ's case note. Your relief is your marginal rate on the recovery; GST is a flat 18%. Above an 18% marginal rate, Form 16 matters more than the GST, and most advice gets that order backwards.

Worked example: assume ₹2,40,000 monthly pay used for the buyout, a 90-day notice period, 30 days served, 15 leave days set off, and a 31.2% marginal rate (30% slab plus 4% cess). Unserved days: 90 minus 30 minus 15 is 45. A day's pay is ₹2,40,000 divided by 30, or ₹8,000, so the buyout is ₹3,60,000. Add 18% GST and the bill reads ₹4,24,800, of which ₹64,800 has no basis. Keeping the recovery out of taxable salary saves ₹1,12,320. Real cost: ₹2,47,680, or ₹1,77,120 below the bill. Try your own pay below; it takes under a minute.

Find the row matching your exit bill and read across.

On the flat-sum row, Indian Contract Act s.74 limits breach compensation to a reasonable amount no higher than the sum the contract names.

Can notice pay be deducted from full and final settlement?

In practice yes, employers net a buyout from your full and final settlement under the contract or your signed consent, though Code on Wages s.18 does not list notice recovery among the deductions it permits from wages. That is the grey area. Our view: netting rests on your contract and consent, not the Code, so ask for it in writing and challenge any figure above the formula. We found no ruling that tests this under the new Code.

Covered establishments must issue a service certificate within 10 days of resignation under the 2026 Model Standing Orders, so holding it over a disputed GST line is their problem. Each leave day set off also cuts the buyout by a day's pay; weigh that against the leave encashment rules (or, more precisely, what your policy pays per day).

• Rebello is a 2017 tribunal ruling; outside Gujarat it persuades but does not bind your assessing officer.
• JSA flags state exemptions such as Karnataka's for IT and ITES firms.
• Pay the undisputed formula amount on time, so only the GST stays open.

The decision is to pay the formula, not the invoice. This week, before signing your F&F, email HR asking them to remove the GST line under Circular 178/10/2022-GST, paragraph 7.5, and to issue Form 16 net of the recovery. This is wrong only if the bill shows no GST and Form 16 is already net, so check Part B first.

Section 70 of the Industrial Relations Code, 2020 lets an employer retrench a worker with one year of continuous service only after three steps: a month's written notice giving reasons (or a month's wages instead), a notice to the government, and retrenchment compensation of 15 days' average pay for every completed year. Section 83 then adds a second, separate 15 days. An exit statement that shows one line for both has short-paid you.

How is retrenchment compensation calculated in India?

You multiply 15 days' average pay by your completed years of continuous service, counting any part-year over six months as a full year, where average pay is your Code wages over the last three complete calendar months.

Two definitions do the work. "Wages" in s.2(zq) leaves out items such as HRA and conveyance, but if those exceed half of total pay, the excess is added back. That is the proviso behind the 50% wage rule that cut take-home pay, and here it works for you: a thin basic no longer shrinks the base.

Timing decides which law applies. A Ministry of Labour release (PIB, 8 December 2025) confirms all four labour codes came into force on 21 November 2025, so a later retrenchment falls under this formula, not the Industrial Disputes Act of 1947. Our view: any guide still built on the 1947 Act describes the wrong payout, since that Act had no reskilling credit. Gratuity stays a separate claim; see the new gratuity rules on one year of service.

Four thresholds in the Code (Act 35 of 2020) decide whether the formula reaches you, and how big the base is:

The allowance cap moves the most money for IT staff. A lean basic with a fat flexible component used to shrink every statutory payout; now the excess flows back into wages. Check the base against your last three pay slips, not your offer letter.

What your exit should pay, by years and wage

For IT workers on ₹30,000 to ₹60,000 of monthly Code wages with two to twelve counted years, the two statutory sums together run from roughly half a lakh to four and a half lakh rupees, before notice pay.

Worked example: take an engineer in a firm below the permission headcount, retrenched after 4 years 7 months, on a monthly gross of ₹90,000: basic ₹36,000, HRA ₹18,000 and ₹36,000 of other excluded allowances. Excluded items total ₹54,000, which is ₹9,000 over half the gross, so Code wages are ₹36,000 + ₹9,000 = ₹45,000. Assume a 26-day month: ₹45,000 ÷ 26 × 15 = ₹25,961.54 per 15-day block. Seven months is more than six, so service counts as 5 years, and s.70 pays 5 × ₹25,961.54 = ₹1,29,808. The s.83 credit is one more block, ₹25,962, paid once. A month's wages in lieu of notice adds ₹45,000. On the rounded figures, the statutory floor is ₹2,00,770. A 30-day divisor pays less, so check which one your employer used.

Find your counted years, then read across at your monthly Code wages; each cell is s.70 compensation plus the s.83 credit.

The shaded cell, 5 counted years at ₹45K, is the worked example minus notice pay; each extra counted year adds ₹17,308 in the left column and ₹34,615 in the right. Your one-minute check: count the months since your last work anniversary, because anything beyond six adds a year. At or above the permission headcount, s.79 demands three months' notice, lifting the example's notice pay to ₹1,35,000 and its floor to ₹2,90,770.

Is a software engineer a "worker" under the Code?

In most cases yes, because s.2(zr) covers technical and skilled work done for hire, and for private IT staff it excludes only people employed mainly in managerial or administrative roles and supervisors whose wages exceed the notified monthly line.

The test is what you do, not what HR calls you. An engineer who codes all day is a worker at any salary; a lead who signs off leave and appraisals is likely "supervisory", and above the pay line loses both sums. The grey area, in our view: the Code never defines "mainly", so a lead who still spends most hours on delivery has a fair argument to stay inside.

The credit runs on its own clock. PRS Legislative Research's summary of the Industrial Relations (Central) Rules, notified on 8 May 2026, says the employer deposits 15 days' last-drawn wages within 10 days of retrenchment and the worker is credited within 45 days. The Code counts from retrenchment; the Rules, as PRS reads them, from the deposit. So the outer limit is day 55 (or day 45, if your state follows the Code's wording; most private IT firms answer to state rules). Firms at the permission headcount must also apply at least 60 days ahead, and s.79(7) makes a retrenchment without permission illegal.

• A "performance exit" or a resignation request is not retrenchment.
• One compensation line on the final statement usually means the credit was folded in.
• Leave encashment is separate again: how leave encashment days get paid.
• A bond deduction needs a real loss behind it: why your employment bond has a proof problem.

The decision is whether to sign, and the answer is only when both sums are on the page. If yours shows one, write to HR this week for the s.70 figure, the s.83 deposit date and the divisor used; if the credit misses the outer limit, raise it on the Ministry of Labour's SAMADHAN portal after checking your state's rules. This is wrong for you only if your role was mainly managerial, where your contract governs instead.