Advance Retention Money to Employee

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A company is considering offering a £15 lakh advance retention payment to an employee for a 15-year commitment. The discussion centres on the tax treatment of this advance in the employee's hands and when the company can claim it as a deduction for tax purposes. While it's common practice to treat it as salary in the year of payment, a counter-argument suggests spreading the deduction over the 15-year period to align with accrual accounting and the matching concept, similar to how a bonus might be handled.

NIKHIL GUPTA

NIKHIL GUPTA (Querist)
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01 July 2023 Hi,
Anyone answer me on my query.

Company want to give Rs.15Lac advance retention money for 15year retention of employee.
What will be the tax treatment in the hands of employee. And in which year company can claim deduction as per income tax act??

Dhirajlal Rambhia online

Dhirajlal Rambhia online

(Expert)
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02 July 2023 It is usual practice to declare it as salary payment to employee in the year of payment, and as such it is claimed as deduction under salary payments in the same year.

NIKHIL GUPTA

NIKHIL GUPTA (Querist)
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03 July 2023 But Sir, Why Company should not claim this amount over the period of time of 15years. Because company following accrual basis accounting and also matching concept says we should book expenses related to income. and we will enjoy income related to this in next 15years.

Dhirajlal Rambhia online

Dhirajlal Rambhia online

(Expert)
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03 July 2023 In that case you will have to divide salary expenditure proportionately. It will be something like Bonus. You should make contract with employee in that manner.

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