Category: Litigation

Sign-On Bonus Repaid to the Old Employer: Can You Deduct It From Salary? (ITAT Chennai)

Posted on by CA Meet Dhrangadhariya

Last updated: 03 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A sign-on bonus is salary and is taxed when you receive it.
  • In S.S.N. Ravi v ACIT (ITAT Chennai, 06/05/2016), an employee who repaid a ₹25 lakh sign-on bonus to his old employer on leaving early was not allowed to reduce his taxable salary by that amount.
  • The Tribunal held that the bonus was a revenue receipt, he left voluntarily, and the Act has no provision to deduct such a repayment from salary.
  • Section 19 of the Income-tax Act, 2025 lists the deductions from salary, and a repaid bonus is not one of them.

A sign-on bonus is a payment to attract you to a job. Most contracts add a clawback: if you leave within a year, you repay it. The tax question that follows is a hard one. You were taxed on the bonus when you got it. Can you reduce your taxable salary when you pay it back?

The tax position on receipt

A sign-on bonus is paid by the employer because of the employment. That makes it salary. Section 16 of the Income-tax Act, 2025 says salary includes wages, fees or commission, perquisites and profits in lieu of salary, and a joining bonus falls in these. The employer deducts TDS under section 392 when it pays the bonus.

The case: S.S.N. Ravi v ACIT

Forum and date: Income Tax Appellate Tribunal, Chennai, order dated 06/05/2016, I.T.A. No. 933/Mds/2015, assessment year 2008-09.

Facts

  • The taxpayer joined Barclays in November 2006 and received a sign-on bonus of ₹25 lakh in FY 2006-07, which he included in his income of that year.
  • The bonus was repayable if he left within one year.
  • He left on 31/10/2007, before the year was complete, and moved to Deutsche Bank. Deutsche Bank paid him ₹25 lakh, which he used to repay Barclays.
  • In his return for FY 2007-08 he reduced his salary by ₹25 lakh. The Assessing Officer added it back.

Decision. The Tribunal dismissed the appeal. In short:

  • The sign-on bonus is a revenue receipt of the nature of employment income.
  • The employee left voluntarily; he was not terminated.
  • Section 17(1) of the 1961 Act made no provision for reducing salary by a refund of the bonus.
  • The amount that the new employer paid to cover the repayment could not be treated as compensation for the lost bonus.
  • The ₹25 lakh could not be reduced from taxable income.

The position under the Income-tax Act, 2025

The 2025 Act has the same structure. Section 19(1) lists the deductions from salary: professional tax, the standard deduction, the retirement exemptions (gratuity, commutation of pension, leave encashment and similar) and compensation items. A repayment of a bonus is not in that list.

The ruling is a Tribunal order on its facts, in a case where the employee left voluntarily and a new employer paid the sum. Do not treat it as settling every repayment: a different fact pattern could be argued differently.

Practical points

  1. Read the clawback clause before you sign. Check the repayment period and whether the repayment is of the gross amount or of the amount net of tax.
  2. If your new employer reimburses the repayment, remember that the reimbursement is a payment from an employer, so expect it to be taxed as salary, with no deduction for the amount you repay.
  3. Take advice before claiming a deduction for a repaid bonus. If you claim it, keep the contract, the repayment proof and the old employer’s acknowledgement.

Frequently asked questions

Is a sign-on bonus taxable?

Yes. It is a payment from the employer in connection with employment, so it is salary under section 16 of the Income-tax Act, 2025 and taxed in the year you receive it, with TDS.

Can I deduct a sign-on bonus that I repay to my old employer?

The Chennai Tribunal held that you cannot reduce your taxable salary by a repaid sign-on bonus when the employee left voluntarily. The Act does not provide a deduction for the repayment.

Does it matter that my new employer reimbursed the repayment?

In S.S.N. Ravi the new employer paid the employee the amount to repay. The Tribunal treated it as a revenue receipt, not a capital receipt, and the employee was taxed on it as well.

Which case is this?

S.S.N. Ravi, Chennai v ACIT, ITAT Chennai, order dated 06/05/2016, I.T.A. No. 933/Mds/2015, assessment year 2008-09.

What should I do before signing a sign-on bonus clause?

Read the clawback terms and ask who bears the tax if you have to repay. If a new employer will reimburse the repayment, ask for advice on how that payment will be taxed in your hands.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Rental Income: House Property or Business Income? Supreme Court Tests (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 22 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Rent from a building you own is taxed as income from house property (section 20 of the Income-tax Act, 2025), with only taxes, a flat 30% and interest as deductions.
  • If letting is itself your business, the same rent can be business income, with actual expenses and depreciation allowed. This depends on facts, not on your choice.
  • The Supreme Court decided this in Chennai Properties (2015), Rayala Corporation (2016) and Raj Dadarkar (2017): look at what the owner actually does, from a businessman’s point of view.
  • A person with long-term rights in a building, such as a lease of 12 years or more, is a deemed owner under section 25, and the rent from sub-letting can be house property income.

Rent from a property can be taxed under two heads, and they are taxed very differently. House property income allows only a flat 30% deduction, local taxes and loan interest. Business income allows the real costs of running the activity. The choice is not yours. It follows from what you actually do.

The two heads

House property (section 20). The annual value of a building and its appurtenant land that you own is chargeable to tax as income from house property, except for the part you occupy for your own business or profession. The deductions are the local taxes you paid, 30% of the annual value and interest on borrowed capital (sections 21 and 22).

Business income (section 26). Profits of a business carried on at any time in the year. If letting out property is itself a business, its profits are computed under the business provisions, with deductions such as salaries of staff, repairs, insurance, depreciation and interest, and the usual books of account.

What the Supreme Court has said

The Court looks at the activity, not just the ownership or the wording of a document.

Case Facts in brief Result
Chennai Properties and Investments Ltd v CIT (09/04/2015) A company whose main object was to acquire properties and let them out; its only income was rent Business income. The object clause alone is not decisive. It depends on the circumstances whether letting is the business
Rayala Corporation Pvt Ltd v ACIT (11/08/2016) A company whose only business was leasing its property and earning rent Business income, following Chennai Properties
Raj Dadarkar and Associates v ACIT (09/05/2017) A partnership firm held a long-term licence over market space, built 95 shops and 30 stalls and sub-licensed them, collecting licence fees and service charges House property income. The firm was a deemed owner; the service charges were inseparable from the rent, and it did not provide organised, systematic services

The test the Court applied in Raj Dadarkar was whether, from a businessman’s point of view, the letting was the doing of a business or the exploitation of property by an owner. In Chennai Properties, where the entire income was from letting properties owned by the company, letting was the business. In Raj Dadarkar, ownership of the property characterised the activity.

A reading to avoid: some articles say Raj Dadarkar held that sub-letting as an activity makes the income business income. On its facts the Court held it was house property income.

Signs that point to business

  • The object and the main activity of the person are letting properties, and that is the only or main source of income.
  • The activity is organised: staff, systematic management, a range of services (not only the use of space), and books of account.
  • Several properties are let continuously, and letting is exploited commercially rather than as a way of holding an asset.
  • The income comes from services (a hotel, a hostel, a co-working space, a hall with caterers), not just the right to occupy.

Signs that point to house property

  • You own one or a few properties and let them as an investment.
  • The rent is for occupation of the building. Any service charge is a minor, inseparable part of the rent.
  • The owner does no organised business activity around the letting.
  • You have acquired rights in the building of the kind listed in section 25(e), such as a lease of 12 years or more, and you sub-let it: you are a deemed owner, so the rent is house property income. That was the basis of Raj Dadarkar, where the firm held long-term rights under a licence.

Worked comparison

A property is let at ₹35,000 a month. Local taxes paid ₹20,000, loan interest ₹60,000.

As house property

Step Amount (₹)
Annual value (35,000 × 12) 4,20,000
Less: local taxes 20,000
Net 4,00,000
Less: 30% 1,20,000
Less: interest 60,000
Income 2,20,000

As business income, if letting is genuinely a business, with actual running costs of ₹1,10,000 (staff ₹60,000, repairs ₹30,000, insurance ₹10,000, depreciation ₹10,000) in addition to taxes and interest:

Step Amount (₹)
Rent 4,20,000
Less: taxes 20,000
Less: interest 60,000
Less: running costs 1,10,000
Profit 2,30,000

The business head is not always lower: in this case the flat 30% deduction under house property is larger than the real costs. A business also brings the burden of books of account and, above the limits, audit. Do not claim a head only for the tax result.

Other points

  • Loss: a house property loss can be set off against other income only up to ₹2,00,000 in the old regime, and not at all in the new regime. A business loss is treated differently (section 109), though it cannot be set off against salary.
  • Basic exemption: if rent is your only income, tax is nil up to the basic exemption limit of your regime, after the deductions for the head.
  • Documentation: keep the agreement, rent receipts, and for a business, evidence of services provided and of the staff and records.

Before you rely on this

The rulings are on their own facts and later cases apply them to different set-ups, so a case-specific opinion is worth having if the amount is large or the Assessing Officer questions your head. The sub-letting position of a deemed owner follows section 25(e) of the 2025 Act (earlier section 27(iiib)).

Frequently asked questions

Is rental income house property income or business income?

Usually house property income. It is business income only when letting is itself the business, as the Supreme Court found in Chennai Properties and Rayala Corporation, where the company’s main business was letting its properties.

Does the object clause of the company decide it?

No. In Chennai Properties the Court said that an entry in the objects is not decisive; the question depends on the circumstances of each case, from a businessman’s point of view.

Who decides which head applies?

The facts decide, and in a return you must report under the head the facts support. The Assessing Officer can differ. You cannot pick the more favourable head.

What deductions are allowed under each head?

House property: local taxes paid, 30% of the annual value and interest on borrowed capital. Business: expenses allowed under the business provisions of the Act (such as staff, repairs, insurance, depreciation and interest), which usually need books of account.

What did Raj Dadarkar decide?

That a partnership firm which held a long-term licence and sub-licensed shops, earning rent and service charges that were inseparable from the rent, was a deemed owner and its income was house property income, not business income.

Is sub-letting income house property or other income?

If you are a deemed owner under section 25 (for example, you hold a lease of 12 years or more), it is house property income. Otherwise it is business income or income from other sources depending on the facts.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Understanding Notice under Section 142(1) of the Income Tax Act

Posted on by CA Meet Dhrangadhariya

Understanding Notice under Section 142(1) of the Income Tax Act

The Income Tax Act, 1961, is a comprehensive legislation that governs the taxation of income in India. One of the key provisions of this Act is Section 142, which deals with the assessment of income tax. Specifically, Section 142(1) empowers the Assessing Officer to issue a notice to the taxpayer, requiring them to file their income tax return.

What is a Notice under Section 142(1)?

A notice under Section 142(1) is a formal communication issued by the Assessing Officer to the taxpayer, requiring them to file their income tax return. This notice is typically issued when the taxpayer has not filed their income tax return or has not furnished the required documents or information.

Why is a Notice under Section 142(1) issued?

A notice under Section 142(1) is issued for several reasons, including:

1. Non-filing of income tax return: If the taxpayer has not filed their income tax return, the Assessing Officer may issue a notice under Section 142(1) to require them to file their return.
2. Non-furnishing of documents or information: If the taxpayer has not furnished the required documents or information, the Assessing Officer may issue a notice under Section 142(1) to require them to furnish the same.
3. Discrepancies in income tax return: If there are discrepancies in the income tax return filed by the taxpayer, the Assessing Officer may issue a notice under Section 142(1) to require them to explain the discrepancies.

What to do if you receive a Notice under Section 142(1)?

If you receive a notice under Section 142(1), it is essential to take immediate action to avoid any penalties or consequences. Here are some steps you can take:

1. Respond to the notice: Respond to the notice within the specified time limit, typically 15 days from the date of receipt of the notice.
2. Furnish the required documents or information: Furnish the required documents or information, such as financial statements, tax audit reports, or other relevant documents.
3. File your income tax return: If you have not filed your income tax return, file it immediately, along with any necessary documents or information.
4. Seek professional help: If you are unsure about how to respond to the notice or need help with filing your income tax return, seek the advice of a tax professional or chartered accountant.

Conclusion

A notice under Section 142(1) is a formal communication issued by the Assessing Officer to the taxpayer, requiring them to file their income tax return or furnish the required documents or information. If you receive such a notice, it is essential to respond promptly and take necessary action to avoid any penalties or consequences. By understanding the purpose and implications of a notice under Section 142(1), you can ensure that you comply with the requirements of the Income Tax Act and avoid any unnecessary complications.

Disclaimer:

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.