Profits in lieu of Salary [Section 17(3)]

Salaries, Tax Ready Reckoner

Section 17(3) defines “profits in lieu of salary” as payments received by an employee in connection with termination of employment or as compensation for any modification in employment terms. These amounts are taxable under the head “Salaries” even if they don’t strictly qualify as salary.

Key Components of Profits in Lieu of Salary

Termination Payments

Retrenchment compensation(exempt up to ₹5 lakh under Section 10(10B))
Golden handshake/VRS payments(exempt up to ₹5 lakh under Section 10(10C))
Notice pay(fully taxable)
Compensation for loss of employment(fully taxable)

Contract Modification Payments

Compensation for accepting reduced remuneration
Payments for altering employment terms

Other Taxable Amounts

Ex-gratia payments(unless specifically exempt)
Non-compete fees(taxable as salary income)
Employee stock options (ESOPs)(taxable as perquisite)

Tax Treatment & Exemptions

PAYMENT TYPE	TAXABILITY	EXEMPTION LIMIT
Retrenchment Compensation	Taxable beyond limit	₹5 lakh (Section 10(10B))
VRS Compensation	Taxable beyond limit	₹5 lakh (Section 10(10C))
Notice Pay	Fully Taxable	No exemption
Non-compete Fees	Fully Taxable	No exemption
Ex-gratia	Fully Taxable	No exemption (unless under approved scheme)

Important Considerations

Exemptions require specific conditions(e.g., VRS must be under approved scheme)
Employer must report in Form 16(even exempt amounts)
TDS appliesunder Section 192 for taxable components
Section 89(1) reliefmay apply for arrears or advance payments