## Profits in Lieu of Salary [Section 17(3)]

Certain payments connected with employment are taxed as salary even though they are not regular salary. Section 17(3) lists them.

### Items covered

1. Compensation for termination — any amount due or received on termination of employment.

2. Compensation for changing employment terms — amounts from an employer or former employer in connection with modification of the terms and conditions of employment.

Exception: payments unrelated to the employer-employee relationship are not taxed as salary.

3. Payments from unrecognised funds — payments from a provident or other fund are taxable to the extent they do not consist of the employee's own contributions or interest thereon. This clause does not cover:

Gratuity [10(10)], Pension [10(10A)], Retrenchment Compensation [10(10B)],
PF/PPF payments [10(11)], RPF payments [10(12)], Approved Superannuation Fund [10(13)], House Rent Allowance [10(13A)].

4. Keyman Insurance Policy — any sum received by the employee under a Keyman Insurance Policy is fully taxable as salary.

5. Any other lump-sum payment — any lump sum from the employer received before employment begins or after it concludes is taxable as salary.

⚠️ Common exam mistakes

Taxing the employee's own contribution / interest portion from an unrecognised fund — only the balance is covered as profits in lieu of salary.
Treating Keyman Insurance Policy receipts as Income from Other Sources rather than salary.
Forgetting that lump sums received before joining or after leaving employment are still salary.
Overlooking the exception for payments unrelated to the employer-employee relationship.

Bare-Act text Section 17(3) · Income-tax Act, 1961 · click to expand

"Profits in lieu of salary" includes: (i) any compensation due to or received by an assessee from his employer or former employer in connection with the termination of his employment or modification of the terms and conditions relating thereto; (ii) any payment due or received from an employer or former employer or from a provident or other fund (to the extent it does not consist of contributions by the assessee or interest thereon), other than payments from funds covered under sections 10(10), 10(10A), 10(10B), 10(11), 10(12), 10(13), 10(13A); any sum received under a Keyman insurance policy including bonus; and any amount due or received before joining or after cessation of employment.

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

⚠️ Common exam mistakes