Profit in lieu of salary is a part of salary income. This payment is made by the employer to his employee in lieu or in addition to his salary or wages. It is included in gross salary and taxed accordingly under the head “Income from Salary”.

The word ‘profit’ is used only to convey any ‘advantage’ or ‘gain’ by receipt of any payment by the employee. As per the Income Tax Act, 1961 “Profit in lieu of salary” includes the following:

• Any compensation due to or received by a employee from his employer or former employer at or in connection with the termination of his employment or modification of the terms & conditions relating thereto is taxable as profit in lieu of salary after providing exemption u/s 10(10B) or 10(10C), if any.

• Any payment (except to the extent it is specifically exempt u/s 10) due to or received by an employee from his employer or former employer or from a provident fund, or other fund which may otherwise be taxable as income from salary. It may be noted that the assessee is entitled to exemption to the prescribed extent in respect of the following payments received by him which are payment of Gratuity, payment of commuted pension, payment of retrenchment compensation, payment from statutory provident fund and public provident fund, payment from recognised provident fund, payment from an approved superannuation fund and payment of House Rent Allowance (HRA).

• Payment from unrecognised provident fund or superannuation fund to the extent it does not consist of contribution by the employee or interest on employee’s contribution.

• Any sum received under a keyman insurance policy including the sum allocated by way of bonus on such policy.

• Any amount received in lump sum or otherwise from any person prior to his joining employment or after cessation of employment with that person.

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