Section 18 — Profits in lieu of salary
Old Act equivalent: Section 17(3) of IT Act 1961 Sub-part: B.—Salaries
Statutory Text
(1) For the purposes of this Part, “profits in lieu of salary” includes,—
(a) the amount of any compensation due to, or received by, an assessee from his employer or former employer at or in connection with the—
(i) termination of his employment; or
(ii) modification of the terms and conditions relating thereto;
(b) any amount due to, or received, whether in lump sum or otherwise, by any assessee from any person—
(i) before his joining any employment with that person; or
(ii) after cessation of his employment with that person;
(c) any payment due to or received by an assessee—
(i) from an employer or a former employer; or
(ii) from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions; or
(iii) any sum received under a Keyman insurance policy as defined in Schedule II (Note 1), including the sum allocated by way of bonus on such policy.
(2) The payment referred in sub-section (1)(c) shall not include any payment referred to in—
(a) Schedule II (Table: Sl. No. 3);
(b) Schedule II (Table: Sl. No. 4);
(c) Schedule II (Table: Sl. No. 8); and
(d) Schedule III (Table: Sl. No. 11).
Sub-sections
Sub-section (1)
Inclusive definition of “profits in lieu of salary” covering three categories:
(a) Compensation on termination or modification of employment terms
(b) Pre-employment or post-cessation payments from any person
(c) Payments from employer/former employer, provident/other funds (employer’s contribution portion), and Keyman insurance policy proceeds
Sub-section (2)
Exclusions: Payments referred to in Schedule II (Table: Sl. Nos. 3, 4, and 8) and Schedule III (Table: Sl. No. 11) are not treated as profits in lieu of salary. These are the exempt categories (gratuity, commuted pension, certain provident fund payments, and retrenchment compensation).
Provisos
None.
Explanations
None.
Tables
None.
Key Structure
- Applies to: Any assessee receiving payments connected with employment (past, present, or future)
- Items included:
- Compensation on termination or modification of employment
- Pre-joining payments (signing bonus, joining bonus, etc.)
- Post-cessation payments
- Employer’s contribution portion of provident fund / other fund
- Keyman insurance policy proceeds (including bonus)
- Exclusions (sub-section 2):
- Schedule II, Sl. No. 3 — death-cum-retirement gratuity
- Schedule II, Sl. No. 4 — commuted pension
- Schedule II, Sl. No. 8 — certain provident fund payments
- Schedule III, Sl. No. 11 — retrenchment compensation
- Monetary limits: None in this section (limits for exempt portions are in section 19 and the Schedules)
Cross-References
- s016-salary-definition — Section 16(f): profits in lieu of salary is included in “salary”
- s015-charging — Section 15: charging section for salary income
- s019-deductions — Section 19: deductions (gratuity, pension commutation, retrenchment, VRS, leave encashment)
- Schedule II (Table: Sl. Nos. 3, 4, 8) — Exempt income items referenced in sub-section (2)
- Schedule III (Table: Sl. No. 11) — Exempt allowance/payment referenced in sub-section (2)
- Schedule II (Note 1) — Definition of “Keyman insurance policy”
Amendment Notes
None noted from the extracted pages.
Practical Notes
- “Profits in lieu of salary” is an inclusive definition — the three categories are illustrative, not exhaustive.
- Clause (b) is especially broad — it catches any payment before joining or after cessation, regardless of the nature of the payment.
- Provident fund payments (clause (c)(ii)) are only taxable to the extent of the employer’s contribution (not the employee’s own contribution or interest thereon).
- Keyman insurance policy proceeds are always treated as profits in lieu of salary, including any bonus allocated on such policy.
- The exclusions in sub-section (2) should be cross-checked against the actual Schedule entries to determine which specific payments are exempt.