Profits in lieu of salary [Section 17(3)]

Profits in lieu of salary are payments received by an employee in addition to the regular salary. The profits in lieu of salary can include both monetary and other forms of compensation. It includes the following

1) Compensation on account of termination of his employment

The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment

2) Compensation on account of modification of the terms and conditions of employment

The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the modification of the terms and conditions of employment. Usually, such compensation is treated as a capital receipt. However, by virtue of this provision, the same is treated as a revenue receipt and is chargeable as salary.

Note: It is to be noted that merely because a payment is made by an employer to a person who is his employee does not automatically fall within the scope of the above provisions. The payment must be arising due to master-servant relationship between the payer and the payee. If it is not on that account, but due to considerations totally unconnected with employment, such payment is not profit in lieu of salary.

3) Payment from provident fund or other funds

Any payment due to or received by an assessee from his employer or former employer from a provident or other fund other than

• Gratuity [Section 10(10)]
• Pension [Section 10(10A)]
• Compensation received by a workman under Industrial Disputes Act, 1947 [Section 10(10B)]
• From statutory provident fund or public provident fund [Section 10(11)]
• From recognized provident fund [Section 10(12)]
• From approved superannuation fund [Section 10(13)]
• Any House Rent Allowance [Section 10(13A)], to the extent to which it does not consist of employee’s contributions or interest on such contributions.

Note: If any sum is paid to an employee at the time of maturity from an unrecognised provident fund it is to be dealt with as follows:

1. that part of the sum which represents the employer’s contribution to the fund and interest thereon is taxable under salaries.
   
   
2. that part of the sum which represents employee’s contribution is not chargeable to tax as no deduction or exemption was available at the time of contribution.
   
   
3. that part of the sum which represents the interest on employee’s contribution is chargeable to tax as ‘income from other sources’.

4) Keyman Insurance policy

Any sum received by an assessee under a Keyman Insurance policy including the sum allocated by way of bonus on such policy.

5) Lumpsum Payment or otherwise

Any amount, whether in lumpsum or otherwise, due to the assessee or received by him, from any person

• before joining employment with that person, or
• after cessation of his employment with that person.

(A) Retrenchment compensation

The retrenchment compensation means the compensation paid under Industrial Disputes Act, 1947 or under any Act, Rule, Order or Notification issued under any law. It also includes compensation paid on transfer of employment under section 25F or closing down of an undertaking under section 25FF of the Industrial Disputes Act, 1947.

It may be noted that compensation on account of termination and due to modification in terms and conditions of employment would be taxable as “profits in lieu of salary”. However, the retrenchment compensation would be exempt under section 10(10B), subject to following limits.

• Amount calculated in accordance with the provisions of section 25F of the Industrial Disputes Act, 1947  i.e., 15 days average pay x completed years of service and part thereof in excess of 6 months or
  
  
• An amount, not less than 5,00,000 as may be notified by the Central Government in this behalf, whichever is lower.

NOTES

1. The above limits will not be applicable to cases where the compensation is paid under any scheme approved by the Central Government for giving special protection to workmen under certain circumstances.
   
   
2. Average pay means average of the wages payable to a workman

• in the case of monthly paid workman, in the three complete calendar months
• in the case of weekly paid workman, in the four calendar weeks,
• in the case of daily paid workman, in the twelve full working days,

preceding the date on which the average pay becomes payable if the workman had worked for three complete calendar months or four complete weeks or twelve full working days, as the case may be, and where such calculation cannot be made, the average pay shall be calculated as the average of the wages payable to a workman during the period he actually worked.

3. Wages for this purpose means all remuneration capable of being expressed in terms of money, which would, if the terms of employment, expressed or implied, were fulfilled, be payable to a workman in respect of his employment or of work done in such employment, and includes

• such allowances including DA as the workman is for the time being entitled to;
• the value of any house accommodation, or of supply of light, water, medical attendance or other amenity or of any other service or of any concessional supply of foodgrains or other articles;
• any travel concession; and
• any commission payable on the promotion of sales or business or both

      However, it does not include

• any bonus
• contribution to a retirement benefit scheme
• any gratuity payable on the termination of his service.

(B) Voluntary Retirement Receipts [Section 10(10C)]

Lumpsum payment or otherwise received by an employee at the time of voluntary retirement would be taxable as “profits in lieu of salary”. However, it would be exempt under section 10(10C), subject to the following conditions

Eligible Undertakings - The employee of the following undertakings are eligible for exemption under this clause:

• Public sector company
• Any other company
• An authority established under a Central/State or Provincial Act
• A local authority
• A co-operative society
• An University established or incorporated under a Central/ State or Provincial Act and an Institution declared to be an University by the University Grants Commission.
• An Indian Institute of Technology
• Such Institute of Management as the Central Government may, by notification in the Official Gazette, specify in this behalf
• Any State Government
• The Central Government
• An institution, having importance throughout India or in any State or States, as the Central Government may specify by notification in the Official Gazette.

Limit - The maximum limit of exemption should not exceed 5 lakh.

Such compensation should be at the time of his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or, in the case of public sector company, a scheme of voluntary separation. The exemption will be available even if such compensation is received in installments.

Guidelines - The schemes should be framed in accordance with such guidelines, as may be prescribed and should include the criteria of economic viability.

Rule 2BA prescribes the following guidelines for the purposes of the above clause

1. It applies to an employee who has completed 10 years of service or completed 40 years of age.
   However, this requirement is not applicable in case of an employee of a public sector company under the scheme of voluntary separation framed by the company.
   
   
2. It applies to all employees by whatever name called, including workers and executives of the company or the authority or a co-operative society except directors of a company or a cooperative society.
   
   
3. The scheme of voluntary retirement or separation must have been drawn to result in overall reduction in the existing strength of the employees.
   
   
4. The vacancy caused by the voluntary retirement or separation must not be filled up.
   
   
5. The retiring employee of a company shall not be employed in another company or concern belonging to the same management.
   
   
6. The amount receivable on account of voluntary retirement or separation of the employee must not exceed the amount equivalent to three months’ salary for each completed year of service or
   
   
7. salary at the time of retirement multiplied by the balance months of service left before the date of his retirement or superannuation.

Notes -

• Where any relief has been allowed to any assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under section 10(10C) shall be allowed to him in relation to that assessment year or any other assessment year.
  
  
• Where exemption for voluntary retirement compensation under section 10(10C) has been allowed in any assessment year, then no exemption there under shall be allowed to him in any other assessment year.
  
  
• Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnover.

 
ILLUSTRATION 1

Mr. Virat received voluntary retirement compensation of Rs.15,00,000 after 30 years 4 months of service in SBI. He still has 6 years of service left. At the time of voluntary retirement, he was drawing basic salary 30,000 p.m, Dearness allowance (which forms part of pay) 10,000 p.m. Compute his taxable voluntary retirement compensation, assuming that he does not claim any relief under section 89.

SOLUTION

Voluntary retirement compensation received                         15,00,000

Less: Exemption under section 10(10C) read
with Rule 2BA [See Note below]                                                   5,00,000

Taxable voluntary retirement compensation                          10,00,000

Note: Exemption is to the extent of least of the following:

(i)      Compensation actually received                                 =  15,00,000