Section 17(3) of Income Tax Act, 1961

What is Section 17(3)-Profits in lieu of Salary?

Section 17(3) of the Income Tax Act, which is Profits in lieu in Salary, mentions the profits an employee earns beyond their regular salary. In common words, these profits are known as a bonus or incentives and are mostly provided in cash. Profits in lieu of salary fall under the head “income from salaries” and are taxable.

Which income is considered as Profits in lieu of a salary under Section 17(3)?

• Terminal compensation
  Terminal compensation refers to payments made to an employee when their employment with a company ends, either due to resignation, retirement, or termination. The purpose of terminal compensation is to provide financial support to the employee during the transition period between jobs or after retirement.
• The amount received under an unrecognized provident fund or superannuation fund
  An unrecognized provident fund or superannuation fund is a fund that needs to be recognized by the tax authorities in a particular country or jurisdiction. Contributions made by an employer to an unrecognized provident fund or superannuation fund may not be tax-deductible, and the amount received by an employee from such a fund may be subject to taxation.
• Payment under Keyman Insurance Policy
  Keyman insurance policy is a life insurance policy taken out by a business on the life of a key employee or owner to protect the company against financial loss that may arise from the loss of that key person. If the key person dies or becomes disabled, the policy pays the business a lump sum payment.
• Payment received before joining or after the termination of employment
  Payments received by an employee before joining or after the termination of employment may be subject to tax depending on the nature of the payment and the tax laws and regulations of the country or jurisdiction where the employee is located.
• Any other amount received by an employee from the employer voluntarily or in accordance with a legal obligation
  In general, amounts received by an employee from an employer, whether voluntarily or in accordance with a legal obligation, may be subject to income tax and social security contributions.

Which income is not considered as Profits in lieu of a salary under Section 17(3)?

• Pension -Section 10(10A)
• Gratuity -Section 10(10)
• Statutory PF -Section 10(11)
• Superannuation Fund -Section 10(13)
• Recognized PF -Section 10(12)
• Retrenchment Compensation - Section 10(10B)
• Rent Allowance - Section 10(13A)

It's always best to consult with a tax professional or accountant for specific guidance on the tax treatment of profits in lieu of salary and any other tax-related matters. They can provide advice on how to structure payments to employees and minimize the tax liability of both the employer and the employee. Contact our experts for more guidance on this.