Computation of 'Profit in Lieu of

Salary' (Section-17(3)
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:

(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. 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'.

(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)

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.