Profits in Lieu of Salary
Besides a person’s monthly salary or annual CTC, other income aspects can affect a salaried individual’s tax situation in India. A component named “profits in lieu of salary” can be found under the head “Income from Salaries” in the Income Tax Act, 1961. These are the money the employer or another person pays to the employee besides or along with salary or wages. Knowing how to identify profits instead of salary is necessary to avoid mistakes in your taxes.
What is ‘Profits in Lieu of Salary’?
Section 17(3) of the Income Tax Act defines profits in lieu of salary as payments made to an employee rather than the salary or wages they are due. They are typically given in full at the moment someone leaves, is fired, retires or signs a settlement agreement with the company. Anything your employer pays you above your regular monthly salary because of working for them could be considered fringe benefits.
Components Included Under Profits in Lieu of Salary
The below-listed payments are generally recognised as income in place of salary.
- Amounts greater than the exempt limit under Section 10(10) are considered to be taxable gratuity, provided they are received when leaving service.
- If you do not work for the government, the taxable portion of your commuted pension acts as profits in place of salary.
- Any leave encashment (over and above what is tax-exempt) given at retirement or when you resign.
- Benefits paid under VRS, when the amount is more than the exemption given in Section 10(10C).
- The extra compensation paid to individuals retrenched who exceed the Section 10(10B exemption.
- Money and interest that accrue from payments made by an employer into unrecognized provident funds.
- Golden handshakes, payouts for settling disputes and damages from employment disputes received at or after your termination are also included.
What Is Not Covered?
Below, you will see examples of income not treated as profit for salary purposes:
- All pension income earned by a government employee is fully exempt.
- Government officials who retire before the age of 60 will not pay tax on their death-cum-retirement gratuity.
- Payments or benefits that are taxed separately as “perquisites” under your pay.
Taxability
Profits received as pay instead of salary are considered taxable under the heading “Salaries” unless a particular exemption applies. For example:
- For non-government staff, the first ₹3,00,000 you withdraw is untaxed; the rest is subject to tax.
- The first ₹20,00,000 of gratuity given to private sector workers is exempted.
TDS and Registration
On salaries as well as commission payments, employers must deduct TDS just like with normal salary. You will find these amounts in Form 16 and the ITR under the heading ‘Income from Salary’.
Get Started with TaxDunia
When you leave your job, refuse a salary, or retire, profits often replace your salary. Although such packages may feel like unexpected rewards, tax laws usually put them under review, and they don’t always go untaxed. Taxpayers need to know how to classify these payments to guarantee they are accurately reported and do not get fined. File your taxes now, and meet the compliance.
