Income Tax 2025

Appearance

Profits in lieu of salary. ​

18(1) ​

For the purposes of this Part, “profits in lieu of salary” includes,—

  • (a) any 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.

18(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).
Explanation

1. Section Summary ​

This section defines "profits in lieu of salary" for tax purposes. It includes various payments received by an individual from an employer, former employer, or other sources that are treated as taxable income under the head "Salaries." These payments are typically linked to employment, such as termination payments, modifications to employment terms, or payments from provident funds or keyman insurance policies.

2. Key Changes ​

  • Expanded Scope of "Profits in Lieu of Salary": The new law explicitly includes payments received before joining or after cessation of employment, as well as payments from provident funds or keyman insurance policies, under the definition of "profits in lieu of salary."
  • Exclusions Clarified: The section now specifies certain payments (referenced in Schedule II and Schedule III) that are excluded from being treated as "profits in lieu of salary."

3. Practical Implications ​

  • For Employees: Payments like termination compensation, joining bonuses, or post-employment settlements are now clearly taxable as salary income. This could increase the tax burden for employees receiving such payments.
  • For Employers: Employers must ensure proper tax withholding (TDS) on these payments to avoid compliance issues.
  • For Provident Funds and Insurance Policies: Payments from provident funds or keyman insurance policies (excluding employee contributions and interest) are taxable under this section, which may affect how these funds are structured or disbursed.

4. Critical Concepts ​

  • Keyman Insurance Policy: A life insurance policy taken by a business on the life of a key employee. The sum received under such policies, including bonuses, is taxable as "profits in lieu of salary."
  • Provident Fund Payments: Only the employer's contributions and interest on those contributions are taxable under this section. Employee contributions and interest on those contributions remain tax-free.
  • Exclusions: Certain payments listed in Schedule II (e.g., specific types of compensation) and Schedule III (e.g., certain exempted payments) are not treated as "profits in lieu of salary."

5. Compliance Steps ​

  • For Employees: Report all such payments under the head "Salaries" in your income tax return.
  • For Employers: Deduct TDS on these payments at the applicable rates and issue Form 16 to employees.
  • For Fund Administrators: Ensure proper classification of payments from provident funds or insurance policies to determine taxable and non-taxable components.

6. Examples ​

  • Example 1: An employee receives ₹5 lakh as a joining bonus from a new employer. This amount is taxable as "profits in lieu of salary."
  • Example 2: An employee receives ₹10 lakh as termination compensation from a former employer. This amount is taxable under this section.
  • Example 3: An employee receives ₹2 lakh from a provident fund, of which ₹1.5 lakh is the employer's contribution and ₹50,000 is interest on the employer's contribution. Only ₹1.5 lakh is taxable as "profits in lieu of salary."

7. Effective Date/Transition Rules ​

The section is effective from the date the new income tax law comes into force. Taxpayers and employers must comply with these provisions for all relevant payments made on or after the effective date. Transitional rules, if any, will be specified in the implementation guidelines.

This section ensures clarity on what constitutes taxable income under "Salaries," helping taxpayers and employers align with the new tax framework.