The job has been offered to you after a few rounds of interviews, and now it’s time to negotiate. Should you expect a signing bonus from your prospective employer? Should you ask for a sign-on bonus instead? Signing bonuses, which are one-time payments made when an employee starts a new job, are common, but not given to every candidate.
Who Hands Out Signing Bonuses?
A signing bonus is a given if you’re a recent graduate, as we saw with companies who needed to staff up quickly near the end of the pandemic, but it’s also not applicable in every case. Beyond the graduate market, employers normally use signing bonuses to attract important employees, which can range from 5% to 10% of the base salary for middle managers and professionals.
Why Do Companies Offer Sign-On Bonuses?
These are some of the reasons why companies use signing bonuses to determine the candidate’s chances of negotiating one:
To overthrow the competition
When a company is competing with other prospective companies for the same candidate, a signing bonus is imperative, especially in fields where demand is high, such as nursing, accounting, or engineering. It also matters whether the candidate applied for a job or was hired by the company. If they were recruited, it is a sign that an employer is seriously interested in them, and they are about to get a signing bonus.
To maintain internal salary equity
When asking for a higher salary, especially at large corporations, a candidate may be told that it is outside the company’s salary range for their level. There may be more salary rigidity, in such a case the company may make up for the difference with the help of a signing bonus.
To compensate for lost benefits
If a company hires an experienced worker who will lose a bonus or other benefits if they leave, the employer may compensate with a signing bonus.
Should a Candidate Accept a Sign-Up Bonus?
If a signing bonus is offered to a candidate, they should understand the terms. Some of them require the candidate to pay back the company if they leave before the allocated date, which could be months or even a year away. Never show signs of eagerness during any stage of the salary negotiation or interview. If possible, avoid immediate gratification in favor of delayed gratification. The candidate should always let the company initiate salary discussions, not the other way around.
The candidate should bear in mind that if the hiring manager offers an Rs2.5 lakh joining bonus to make the deal sound more lucrative, it will not be so next year. As a result, your take-home pay will be lower in the second year.
Instead, request an Rs10,000 monthly raise. Though there will be no immediate cash, the cumulative benefits will be much greater and permanent. The new appointment should add long-term, permanent value to an individual’s career rather than being a fresh start for money-related reasons.
The ‘Joining Bonus’ paid back to the ex-employer cannot be subtracted from salary income! So, while negotiating one’s employment contract and pay package, one should understand his/her income tax liabilities and negotiate for income tax liability as well.
(A) The grey areas in tax treatment are a source of irritation for many taxpayers
Taxpayers and their advisers/consultants are also concerned about such issues. Internal departmental directives that link tax collection to the performance of department officials, future placements and promotions, and so on are a factor in evaluating their performance. So they must carry out their responsibilities! Employees should not sign employment contracts until there are no grey areas, i.e. areas on which the candidate is unclear, and then his/her advisors and counsels are unclear.
So that the employee can plan his or her strategy for dealing with it and negotiate his or her employment contract and pay package. Employees, as well as their advisors and consultants, must stay informed. A well-informed candidate who has access to capable senior local counsels is always in a better position to defend his or her interests than other employees who aren’t well-equipped and lack the courage to defend their interests.
B) Is the employee liable to pay tax on the bonus that was returned?
Can an employee claim a TDS refund on a ‘Joining Bonus,’ Sign-on Bonus, or Signing Bonus? The Income Tax Appellate Tribunal – Chennai (ITAT) examined the matter and came up with an answer: ‘Joining Bonus returned to ex-employer cannot be deducted from a salary! The employee reduced his taxable income by the amount of joining/Sign-on Bonus/of Rs.26,00,000/-refunded to his previous employer and filed a refund claim for Rs.8,72,266/-. The assessing officer deducted Rs.26,00,000/- from the taxable salary.
Section 17(1) of the Income Tax Act does not provide any details or explanation for the reduction of the Signing Bonus, which is returned to the previous employer. Salary income tax provisions do not allow for such a deduction. This deduction was denied by the Tax Officer, then the Commissioner, and finally by the ITAT at the highest level of the judiciary. A refund of Rs.8,72,266/- was not permitted! The employee chose Resignation and was not fired by the employer. His refund request was also evaluated from this angle.
C) As a result, when an employee joins a new employer and receives an “Enrolment Bonus”; Tax fixes it, and when the employee violates the conditions linked to this Premium and quits his job and receives the reimbursement of the amount of the “Entry Premium”, no deduction from taxable income is authorized. It is entirely the fault of the employee who either does not consult in advance or does not negotiate or does not negotiate properly.
(D) ITAT’s clear decision will go a long way toward alerting many employees in similar situations, as well as their advisors and consultants
The ‘Joining Bonus,’ also known as the Sign-on Bonus or the Signing Bonus, is a global concept. In its most basic form: The Sign-on Bonus, also known as the Signing Bonus, is an incentive paid to an employee to join a company. It is a certain amount of money paid to make the compensation package more attractive. It could also be to make up for the loss of some penalty/notice pay that the employee may have had to pay to the previous organization to join the next employer with little or no notice to the previous employer. If an organization offers a ‘Joining Bonus’/ ‘Signing Bonus’, the employee must pay back the bonus amount if the employee leaves the job before the stipulated period.
It is the employee’s responsibility to consider his or her interests and determine how much cash he or she has on hand and how much total pay he or she will receive if he or she leaves employment before one year, such as a joining bonus, notice pay, and so on, as well as what his or her net earnings and take-home pay will be after IT and any tax liabilities that he or she will have to bear on his or her own. The pay package may be examined to address the needs of Tax Treatment. IT could be incorporated into CTC; Cost to Company. Smart employees who are well informed, united, and have access to very capable LOCAL counsels can handle such matters, defend their interests, and avoid LOSS.
(E) A ‘Joining Bonus’/Sign-on Bonus/Sign-on Bonus could be made as a percentage of CTC, say 10% or 20%
To determine the cost the business will incur when a new employee arrives, the employer and IT lawyers in line management/ human resources/administration/personnel / legal units can include many elements. It can be placed in front of the employee to sign as part or as an attachment to the letter of appointment and can include: DA, HRA, transportation allowance, medical allowance, LTA, motor vehicle allowance, municipal compensation allowance, special allowance, Phone/mobile allowance, Bonuses, Incentives, Achievement bonus, Membership bonus, etc. and can calculate; tip, PF, ESIC, retirement pension, and even group insurance, among others.
Savings on Income Tax
You are not required to say no to more money. There are some things you can do to lessen the damage if something goes wrong. You can convince Human Resources to remove the reimbursement clause from your letter of offer. The employee who is being attracted by the next employer is thought to be useful to the next employer.
Takeaway
Examine your offer letter thoroughly. They have no incentive to appear sympathetic to you as you leave them. Taxes are complicated. Understand the rules before delving into them. If the employer declares a bonus in the middle of the fiscal year, TDS for the remaining months will only rise. The TDS on the increased salary would be calculated by the employer after the bonus was declared. So, if you receive a bonus from your employer, understand its taxability and include it in your tax returns. Employers mostly care when you join them. Not so much when you leave. Tread carefully.
