Profits-in-Lieu-of-Salary

Profits in Lieu of Salary

Profits in Lieu of Salary – Income Tax

Profits in lieu of salary are payments received by an employee in addition to the regular salary. The profits in lieu of salary can include both monetary and other forms of compensation. Profits in lieu of salary is taxable under the Income Tax Act and must be declared while filing income tax return. In this article, we provide a description of the concept of profits in lieu of salary.

Terminal Compensation

Any amount of compensation received by an employee from his employer or former employer in connection with the termination of employment or modification of terms and conditions of employment is regarded as profits in lieu of salary. An example of terminal compensation could be the amount paid on retirement, premature termination, resignation or other circumstances.

Keyman Insurance Policy

Any payment received by an employee, under a keyman insurance policy including the sum allocated by way of bonus on such policy, will be regarded as profits in lieu of salary.

Unrecognised Provident Fund or Unrecognised Superannuation Fund

Payment due or received by an employee from an unrecognised provident fund or unrecognised superannuation fund to the extent to which such payment does not consist of contributions by the employee or interest on such employee’s contributions are profits in lieu of salary. The accumulated balance of an unrecognised provident fund or unrecognised superannuation fund consists of the employee’s contribution plus interest thereon and the employer’s contribution plus interest thereon. Employers contribution and interest thereon and interest on the employee’s contribution are not taxed during the period of employment.  Hence, when the accumulated balance of such a fund is paid to the employee either on retirement or on termination of service, the untaxed portion is taxed as profits in lieu of salary. The interest component available as part of employees’ contribution would be taxed as “Income from other sources”.

Other Payments from Employer considered as Profits in lieu of Salary

Any other payment made by an employer to an employee is taxable 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 the category of profits in lieu of salary. Also, taxpayers should note that any amount received by an employee, whether in a lump sum or otherwise before joining any employment or after cessation of employment is taxable as profits in lieu of salary.

Payments NOT Profits in Lieu of Salary

The following payments received by an employee will not be termed as profits in lieu of salary to the extent they are exempt under Section 10:

  • Death cum retirement gratuity
  • Commuted value of pension
  • Retrenchment compensation received by a workman
  • Payment received from a statutory provident fund
  • Payment received from recognised provident fund
  • Any payment from an approved superannuation fund
  • House rent allowance (HRA)

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