What is a clawback clause?

What is a clawback clause?

Salary & compensation Updated October 2026

A clawback clause lets an employer recover bonuses, commissions or equity already paid when a defined trigger such as fraud, misconduct or a restatement occurs. Malus cancels unpaid deferred pay instead. Companies Act Section 199 and RBI bank rules require clawbacks; elsewhere they are contractual.

A clawback clause is a term in an employment contract or incentive plan that lets the employer recover pay it has already paid or vested, typically a bonus, commission or equity, when a defined trigger occurs such as fraud, misconduct or a restatement of results. It usually sits alongside a malus clause in the variable pay scheme.

Clawback vs malus

Point Malus Clawback
Acts on Unvested or deferred pay Pay already received or vested
Mechanism Employer simply does not release it Employee has to return money
Practical difficulty Low, the money is still with the company High, often needs a demand notice or a civil claim

This is why regulators pair the two with deferred compensation: holding money back makes malus easy and reduces the need to chase a clawback.

Where Indian law already requires one

  • Companies Act, 2013, Section 199: if a company has to restate its financial statements because of fraud or non-compliance, it must recover excess remuneration, including stock options, from the managing director, whole-time directors, manager or CEO for the restated period.
  • Banks: RBI’s compensation guidelines for private sector and foreign-owned banks require malus and clawback on deferred variable pay of senior executives and material risk takers.
  • Stock exchanges and clearing corporations: SEBI’s norms for key management personnel of these institutions reportedly require malus and clawback in the compensation policy. Check the current SEBI master circular before quoting it.

For everyone else the clause is purely contractual, so it should spell out the triggers, the look-back period, the amount (gross or net of tax) and how repayment happens.

Frequently asked questions

Can the employer deduct a clawback straight from salary?

Not safely. Section 18 of the Code on Wages, 2019 lists the deductions allowed from wages and caps them at 50 percent, and a bonus clawback is not clearly one of them. Most employers ask for repayment directly or set it off against exit dues in the full and final settlement, which itself can be disputed.

Will a court enforce it?

Courts look at whether the clause is a genuine recovery of pay linked to a proven trigger, or a penalty in disguise. A clause tied to established misconduct, after a proper domestic enquiry, stands on firmer ground than one tied to a vague “loss of confidence”.

Does the employee get back the tax paid on a clawed-back bonus?

There is no specific provision in either Income-tax Act for this, and the treatment is unsettled. Many clauses therefore recover only the net amount the employee actually received; agree this with your tax adviser.

Clawbacks most often follow a misconduct finding, so see our guide to the misconduct, termination and domestic inquiry process for the steps that come first.

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