Profits in lieu of salary
[Section 18 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 18(1) of Income Tax Act 2025
18(1) For the purposes of this Part, “profits in lieu of salary” includes,—
- (a) any amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the—
- (i) termination of his employment; or
- (ii) modification of the terms and conditions relating thereto;
- (b) any amount due to or received, whether in lump-sum or otherwise, by any assessee from any person—
- (i) before his joining any employment with that person; or
- (ii) after cessation of his employment with that person;
- (c) any payment due to or received by an assessee—
- (i) from an employer or a former employer; or
- (ii) from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions; or
- (iii) any sum received under a Keyman insurance policy as defined in Schedule II (Note 1), including the sum allocated by way of bonus on such policy.
Section 18(2) of Income Tax Act 2025
18(2) The payment referred in sub-section (1)(c) shall not include any payment referred to in––
- (a) Schedule II (Table: Sl. No. 3);
- (b) Schedule II (Table: Sl. No. 4);
- (c) Schedule II (Table: Sl. No. 8); and
- (d) Schedule III (Table: Sl. No. 11).
FAQs on Section 18 of Income Tax Act 2025
1. What is meant by “Profits in Lieu of Salary” under the Income Tax Act, 2025?
“Profits in Lieu of Salary” refers to specific payments made to an employee by their employer (or former employer) instead of salary. These payments are taxable under the head “Salaries” as per Section 18(1) of the Act.
2. What types of payments are considered as “Profits in Lieu of Salary”?
Under Section 18(1), the following payments qualify:
- Compensation on termination of employment.
- Compensation for modification of employment terms.
- Payments received before joining or after cessation of employment.
- Payments from employer/former employer or from provident/other funds (excluding employee contributions and interest).
- Sum received under a Keyman Insurance Policy, including bonuses.
3. Is compensation received on termination of employment taxable?
Yes, any compensation received from an employer (or former employer) upon termination of employment is taxable as “Profits in Lieu of Salary” under Section 18(1)(a)(i).
4. Are payments made before joining a company taxable?
Yes, any payment received before joining an employment position is considered “Profits in Lieu of Salary” and is taxable under Section 18(1)(b)(i).
5. Are payments received after leaving a company taxable?
Yes, any amount received after cessation of employment is taxable under Section 18(1)(b)(ii), unless specifically exempted under Schedule II or III.
6. What is the tax treatment of Keyman Insurance Policy payouts?
Any sum received under a Keyman Insurance Policy, including bonuses, is taxable as “Profits in Lieu of Salary” under Section 18(1)(c)(iii).
7. Are payments from a provident fund taxable?
Payments received from a provident or other fund are taxable, except for the portion consisting of employee contributions and interest thereon, as per Section 18(1)(c)(ii).
8. Are there any exclusions from “Profits in Lieu of Salary”?
Yes, Section 18(2) excludes specific payments listed in:
- Schedule II (Table: Sl. No. 3, 4, and 8)
- Schedule III (Table: Sl. No. 11)
9. Is gratuity included in “Profits in Lieu of Salary”?
Gratuity is typically covered under separate provisions and may be exempt subject to conditions in Schedule II or III. If not exempt, it may be taxed as “Profits in Lieu of Salary.”
10. Are severance packages taxable under this provision?
Yes, severance pay is considered a termination compensation and is taxable under Section 18(1)(a)(i).
11. Is voluntary retirement compensation covered under this provision?
Voluntary Retirement Scheme (VRS) payments are typically covered under special exemptions. If not exempt, they may be taxable under Section 18(1)(a)(i).
12. How is tax calculated on “Profits in Lieu of Salary”?
These payments are taxed as part of Salary Income in the year of receipt, as per applicable tax slabs. Some payments may qualify for relief under Section 157 for tax averaging.
13. Are stock options (ESOPs) considered “Profits in Lieu of Salary”?
ESOPs are generally taxed separately under perquisites but may be taxable under this section if received as a lump-sum compensation instead of salary.
14. If my employer pays me a lump sum after retirement, is it taxable?
Yes, unless it falls under an exempt category specified in Schedule II or III, such payments are taxable as “Profits in Lieu of Salary.”
15. Can an employee claim any deductions on these payments?
Employees may claim Section 157 relief in cases of arrears or lump-sum payments to reduce tax burden.
16. Are settlement payments received in court cases taxable?
Yes, if such payments arise from employment termination, modification, or post-employment agreements, they are taxable under Section 18(1).
17. How are signing bonuses treated for tax purposes?
Signing bonuses (pre-employment payments) are taxable under Section 18(1)(b)(i) as “Profits in Lieu of Salary.”
18. If I receive compensation in installments, when is it taxed?
Each installment is taxed in the year of receipt unless eligible for Section 157 relief.
19. Are ex gratia payments considered “Profits in Lieu of Salary”?
Yes, if the ex gratia payment is made due to employment termination or modification, it is taxable under Section 18(1)(a).
20. How should I report “Profits in Lieu of Salary” in my tax return?
These should be reported under the “Salaries” head in your ITR Form as per the income tax return filing guidelines.
“Profits in Lieu of Salary” under Section 18(1) of the Income Tax Act, 2025 encompasses various payments made to an employee as compensation in place of regular salary. These include termination benefits, pre- and post-employment payments, employer-provided lump sums, and Keyman insurance payouts. Such payments are taxable under the “Salaries” head unless specifically exempted under Schedule II or III.
Taxpayers can also explore relief options under Section 157 to reduce the burden of tax on arrears or lump-sum payments. Proper tax planning and compliance with reporting requirements ensure smoother tax filings and avoid unnecessary liabilities.
