GUIDESMONEY MATTERS
Understanding Profit in Lieu of Salary: A Comprehensive Guide
4 MIN • 
LAST EDITED BY SAYAN DAS ON APRIL 25, 2025.
LAST EDITED BY SAYAN DAS ON APRIL 25, 2025.
GUIDES LAST EDITED BY SAYAN DAS ON APRIL 25, 2025.
Most of us are familiar with the concepts of salary and profits. Salary is the compensation that an employer pays to their employees every month for the work they do. On the other hand, profits are the surplus earnings that businesses make after deducting their expenses from their revenue.
However, you may be wondering, what are 'profits in lieu of salary'? Well, as introduced by the Income Tax Act, of 1961, profits in lieu of salary refer to any amount you receive from the employer before joining the employment or after termination, in addition to your regular monthly salary.
The profits in lieu of salary, as per Section 17(3) of the Income Tax Act, is defined as any compensation received by the employees from their employer when terminating their employment or modifying the terms and conditions of employment.
It also includes any amount received from an unrecognised provident or superannuation fund. As the scope of profits in lieu of salary is predetermined, some types of receipts specifically fall under or outside its purview.
Profit in lieu of salary specifically includes any sum received from a current or previous employer as compensation for termination of employment or modification of terms and conditions of employment.
It also includes any sum received from the current or previous employer, a Provident Fund, or any other fund. However, this amount shall not include the contribution made by the employee and interest accrued on the same.
Any sum received as a bonus or otherwise under the Keyman insurance policy shall specifically fall within the scope of profits in lieu of salary.
If the employee received any amount, whether in a lump sum or otherwise, from any person before joining or after cessation of employment, such income is also considered as profits in lieu of salary.
Although employees receive the following items in addition to their regular salary, they are specifically excluded from the purview of profits in lieu of salary:
Just like regular salary is taxed, any sum you receive as a profit in lieu of salary is also taxed under the heading 'Income from Salaries'. The rate at which such income is taxed will depend on your total income and the tax bracket.
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Profits in lieu of salary, as defined by the Income Tax Act, refer to any additional compensation received by employees from their employer before joining or after termination, beyond their regular monthly salary. This includes amounts received for termination or modification of employment, from unrecognised provident or superannuation funds, or under a Keyman insurance policy. Such income is taxed under the heading 'Income from Salaries' based on the individual's total income and tax bracket. Exclusions from profits in lieu of salary include gratuity, commuted pension value, retrenchment compensation, statutory and recognised provident funds, approved superannuation funds, and rent allowance.
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Regular salary income refers to the standard monthly payment an employer makes to an employee for work performed. In contrast, profit in lieu of salary represents any extra compensation paid to the employee, in addition to their regular salary.
Common scenarios in which an amount received by an employee from their employer is considered as profit in lieu of salary include: (i) receiving a sum before joining employment, (ii) receiving compensation upon termination of employment, (iii) receiving a sum from a keyman insurance policy, and (iv) receiving payment from an unrecognised provident or superannuation fund.
Profits in lieu of salary are considered part of an individual's salary income and are taxed under the head 'Income from Salary'. The applicable tax rate for an employee depends on their total income and the income tax slab they fall into.
