Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

[Section 17(3)] – ‘Profits in lieu of Salary’ under Income Tax Act. – for computing Salary Income

Section 17(3) gives an inclusive definition of “Profits in lieu of salary”. As the name suggests,  these payments are received by the employee in lieu of or in addition to salary or wages. These  payments include the following:

[Section 17(3)] - ‘Profits in lieu of Salary’   under Income Tax Act. - for computing Salary Income
[Section 17(3)] – ‘Profits in lieu of Salary’ under Income Tax Act. – for computing Salary Income

1.   Terminal Compensation:

The amount of any compensation due to or received by an assessee  from his employer or former employer at or in connection with the termination of his employment or  the modification of the terms and conditions relating thereto is regarded as profits in lieu of salary. The  termination may be due to retirement, premature termination, resignation or otherwise.

2.   Payment from an Unrecognised Provident Fund or an Unrecognized Superannuation Fund:

The next category of such profit in lieu of salary is, payment due to or received by an assessee from an  unrecognised provident fund or an unrecognised superannuation fund to the extent to which such  payment does not consist of contributions by the employee or interest on such employee’s  contribution.

In other words, total employer’s contribution till date and interest on such employer’s contribution  would both be taxable. The accumulated balance of an unrecognised provident fund and unrecognised  superannuation fund, consists of the employee’s own contribution plus interest thereon and the  employer’s contribution plus interest thereon. Employer’s contribution and interest thereon and interest  on the employee’s contribution are not taxed during the period of employment. When the accumulated  balance of such a fund is paid to the employee either on retirement or on termination of service, the  untaxed portion, i.e. the employer’s contribution and interest thereon is taxed as ‘profit in lieu of  salary’. The interest on employee’s contribution is taxed as ‘Income from other sources’.

See also  [ Section 46 and 47]- Transactions Not regarded as Transfer for purposes of Capital Gains

3.   Payment under Keyman Insurance Policy:

Any payment due to or received by an  employee, under a Keyman Insurance Policy including the sum allocated by way of bonus on such  policy, will also be regarded as profit in lieu of salary.

4.   Any amount due or received before joining or after cessation of employment:

Any  amounts due to or received, whether in lump sum or otherwise by any assessee from any person—

(A)          before his joining any employment with that person; or

(B)          after cessation of his employment with that person.

5.   Any other sum received by the employee from the employer:

All other payments made by  an employer to an employee, would be brought under the head “Profits in lieu of salary”. This is a  comprehensive provision by virtue of which all payments made by an employer to an employee  whether made in pursuance of a legal obligation or voluntarily are brought under profit in lieu of  salary.

However, the following receipts, will not be termed as ‘profits in lieu of salary’ to the extent they  are exempt under section 10.

(i)            Death-cum-retirement gratuity — Section 10(10)

(ii)           Commuted value of pension — Section 10(10A)

(iii)          Retrenchment compensation received by a workman — Section 10(10B)

(iv)          Payment received from a statutory provident fund — Section 10(11)

(v)           Payment received from recognised provident fund — Section 10(12)

(vi)          Any payment from an approved superannuation fund as per section 10(13)

(vii)        House rent allowance exempt under section 10(13A)

See also  [Section 43(1)] - Notional Actual Cost of Assets - for Computing Profits and Gains of Business or Professions

In short, except for the terminal and other payments specifically exempted under clauses (10) to  (13A) of section 10, all other payments received by an employee from an employer or former  employer are liable to tax under this head.

Note :

It may be noted that any compensation or other payment, due to or received by any person, by whatever name  called, in connection with the termination of his employment or the modification of the terms and conditions  relating thereto shall be taxable under the head ‘Income from other sources’ if the same is not taxable as  “Profits in lieu of salary”. [Section 56(2)(xi)]

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