Profits in Lieu of Salary
Introduction
Profits in lieu of salary refer to specific components deemed as salary payments, including compensation for employment termination, payments from unrecognized provident funds, or under keyman insurance policies. Such amounts are taxable in the hands of employees.
Key Inclusions in Profits in Lieu of Salary
- Compensation for Loss of Employment [Section 17(3)(i)]
- Includes amounts due or received upon employment termination or modification of terms.
- Taxable on receipt or accrual, whichever is earlier.
- Exemption: Retrenchment compensation up to 5,00,000 is exempt under Section 10(10B).
- Voluntary Retirement Compensation [Section 17(3)(i)]
- Taxable as profits in lieu of salary.
- Exemption: Up to 5,00,000 under Section 10(10C).
- Payments from Unrecognized Provident Fund [Section 17(3)(ii)]
- Employer’s contributions and interest are taxable as profits in lieu of salary.
- Interest on employee’s contributions is taxable under “Income from Other Sources.”
- Keyman Insurance Policy [Section 17(3)(ii)]
- Any sum received by an employee under a Keyman insurance policy (including bonuses) is taxable as profits in lieu of salary.
- Payments Before or After Employment [Section 17(3)(iii)]
- Lump-sum or periodic payments received before joining or after cessation of employment are taxable.