Section 17(3) of the Income Tax Act, which is Profits in lieu in Salary, mentions the profits an employee earns beyond their regular salary. In common words, these profits are known as a bonus or incentives and are mostly provided in cash. Profits in lieu of salary fall under the head “income from salaries” and are taxable.
The profits in lieu of salary, as per Section 17(3) of the Income Tax Act, is defined as any compensation received by the employees from their employer when terminating their employment or modifying the terms and conditions of employment.
It also includes any amount received from an unrecognised provident or superannuation fund. As the scope of profits in lieu of salary is predetermined, some types of receipts specifically fall under or outside its purview.
Which income is considered as Profits in lieu of a salary under Section 17(3)?
- Terminal compensation
Terminal compensation refers to payments made to an employee when their employment with a company ends, either due to resignation, retirement, or termination. The purpose of terminal compensation is to provide financial support to the employee during the transition period between jobs or after retirement. - The amount received under an unrecognized provident fund or superannuation fund
An unrecognized provident fund or superannuation fund is a fund that needs to be recognized by the tax authorities in a particular country or jurisdiction. Contributions made by an employer to an unrecognized provident fund or superannuation fund may not be tax-deductible, and the amount received by an employee from such a fund may be subject to taxation. - Payment under Keyman Insurance Policy
Keyman insurance policy is a life insurance policy taken out by a business on the life of a key employee or owner to protect the company against financial loss that may arise from the loss of that key person. If the key person dies or becomes disabled, the policy pays the business a lump sum payment. - Payment received before joining or after the termination of employment
Payments received by an employee before joining or after the termination of employment may be subject to tax depending on the nature of the payment and the tax laws and regulations of the country or jurisdiction where the employee is located. - Any other amount received by an employee from the employer voluntarily or in accordance with a legal obligation
In general, amounts received by an employee from an employer, whether voluntarily or in accordance with a legal obligation, may be subject to income tax and social security contributions.
Which income is not considered as Profits in lieu of a salary under Section 17(3)?
- Pension -Section 10(10A)
- Gratuity -Section 10(10)
- Statutory PF -Section 10(11)
- Superannuation Fund -Section 10(13)
- Recognized PF -Section 10(12)
- Retrenchment Compensation – Section 10(10B)
- Rent Allowance – Section 10(13A)
FAQs
Is any exemption available for profits in lieu of salary?
Certain exemptions are available for specific types of payments made by an employer to an employee, such as leave travel allowance, medical allowance, and reimbursement of certain expenses. However, these exemptions are subject to certain conditions and limitations as per India’s Income Tax Act 1961.
How are profits in lieu of salary taxed in India?
In India, profits in lieu of salary are taxed as per the slab rates applicable to the employee’s total income. The tax treatment may vary depending on the nature of the payment and the tax laws and regulations of the country or jurisdiction where the employee is located.