Deferred Compensation

Meaning & Definition

A portion of an employee’s earnings designated for future payout (subject to meeting certain requirements or through the mistakes of a defined period) is called Deferred Compensation. This compensation is generally utilized to retain employees and motivate continued performance over an extended period.

Importance of Deferred Compensation

• Supports in keeping your top and talented employees.
• Encourages a longer commitment and loyalty from employees.
• Supports organized planning for rewards and incentives for employees.
• Gives better management of cash flow by providing flexibility for employers.
• Aligns outcomes of employee performance with the long-term strategy of the business.

Compliance & Policy Considerations  

In India, deferred compensation does not have any specific laws that dictate how it should be regulated, but instead must comply with the Income Tax Act 1961, Employment Contracts, and rules governing benefits, bonuses, and retirement benefits. Taxation of deferred compensation will vary by type of payment and when the payment takes place.