 Profits in lieu of Salary as explained in Section 17(3)

It includes –
(1) 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) Any payment due to or received by an assessee from an employer or from a provident fund or other fund, to the
extent it does not consist of contributions by the assessee of interest on such contributions.
(3) Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
(4) Any amount due to or received, whether in lump sum or otherwise, by any assessee from any person -
(a) before his joining any employment with that person, or
(b) after cessation of his employment with that person
For example: Dearness allowance, house rent allowance, city compensatory allowance, etc. are taxable as profits in lieu
of salary
 Exemption available in respect of "Gratuity"[Section 10(10)]-
Gratuity [Section 10(10)]: The exemption to the assessee who is in receipt of gratuity from their employers at the time
of death or retirement from employment is as under-
Section Particulars of Employee Amount of exemption
10(10)(i) Central Government Fully Exempt
employees/ Members
of civil services Local
authority employees
etc.
10(10)(ii) Other Employees : Least of the following is exempt -
Employees covered (i) Rs.20 lakh, or
under Payment of (ii) Actual gratuity received; or
Gratuity Act, 1972 (iii) (15/26) x Salary last drawn x No. of completed years of service
or part thereof in excess of 6 months.
Note: - Salary =Basic pay+ Dearness allowance (always included).
In case of seasonal establishment, 15 days shall be substituted by
7 days.
Part of a year exceeding 6 months is taken as a full year.
10(10)(iii) Employees not covered Least of the following is exempt –
by the payment of (i) Rs.20 lakh, being the specified limit, or
Gratuity Act, 1972 (ii) Actual gratuity received: or
(iii) ½ x Average Salary x Completed years of service
(fraction of a year not to be considered)
Average salary= Average of salary in last 10 months preceding the
month of retirement.
For example: Retirement is on 15 February 2025, then average
salary will be average of salary from 1" April 2024 to 31"
January 2025.
Salary= Basic pay+ Dearness allowance (to the extent it forms
part of retirement benefits) + % wise fixed commission on
turnover.
Notes:-
(1) Gratuity received by an employee while in employment is fully taxable
(2) If an individual receives gratuity from more than one employer in the same previous year, then the total amount of
exemption claimed in that previous year shall not exceed Rs.20 lakhs.
(3) If an assessee has already availed exemption in respect of any gratuity received from previous employer in earlier
years, then while computing the exemption in the current year, the maximum exemption limit of Rs. 20 lakhs shall be
reduced by the amount of exemption already availed.
 Exemption of Earned leave salary [Section 10(10AA)]: Exemption for leave encashment received by
an individual from his employer, on retirement, superannuation or otherwise is as under-
(i) In case of Government employees: Wholly exempt
(ii) In case of any other Employees (including the employees of a local authority/ a statutory corporation):
Least of the following is exempt-
(a) Actual amount received, or
(b) Rs.25,00,000
(c) 10 months average salary, or
(d) Average salary x leaves at the credit of an employee taking 30 days in a year for completed years of service
(fraction of year is to be ignored while computing completed years of service)
Where-
 Salary = Basic pay + Dearness Allowance (if it forms part of retirement benefits) + Percentage-wise fixed commission
on turnover.
 Average Salary= Average of salary drawn in the last 10 months immediately preceding the date of retirement. (Eg. If
a person retires on 16 March, 2024, then 10 months average salary shall be computed from 16" May, 2023 to 15th
March, 2024)
 Leaves standing at the credit of employee = [Annual Leave Entitlement (taking 30 days in a year) x Completed years of
actual service rendered]-Leaves actually availed in service.
Other Notes:
(1) Exemption is also available for leave encashment received on resignation as it is covered under the expression
otherwise
(2) No exemption is available in respect of leave encashment received during continuity of employment. However, relief
u/s 69 can be availed.
(3) When leave encashment is received by an employee from more than one employer in the same previous year, then
the aggregate quantum of exemption must not exceed the limit of Rs.25,00,000 in that year.
(4) If the employee has already availed an exemption under section 10(10AA) in any earlier year, then the limit of
Rs.25,00,000 shall be reduced by the amount of the exemption already claimed for computing the exemption in the
current year.
(5) Leave salary paid to widow/legal heirs of the assessee, who dies during the employment, will not be taxable
(6) Leave salary received by the family of government employee or legal heirs of deceased employee is also not taxable
in their hands.
 Exemption in respect of Commuted Pension [Section 10(10A)]
Commuted Pension [Section 10(10A)]: The exemption, in respect of commuted pension reserved by an employee
during a previous year is as under-
Particulars of employee Amount of exemption
1. Employees of the Central Government/ local Wholly Exempt
authorities/ Statutory Corporation/Members of
the Defence Services
2. Other employees -
(a) In receipt of gratuity Exemption= 1/3 of Commuted value of pension
(b) Not in receipt of gratuity Exemption= 1/2 of Commuted value of pension

Notes:
(1) Commuted value of pension= Pension received / % of pension commuted.
(2) Uncommuted pension is fully taxable for all kinds of employees. (i.e. whether government employee or non-
government employee)
(3) Pension received from UNO is exempt.
(4) Commuted Pension received from pension fund established by LIC or any other approved insurer under section
10(23AAB) is exempt from tax for all employees
(5) Family pension received by legal heirs is not income from salaries; it shall be taxed as "Income from other sources”.

 Treatment of Leave Travel Concession (LTC) granted by an employer to his employee

Leave Travel Concession [Section 10(5)]: This section gives the exemption to an assessee in respect of Leave Travel
Concession (LTC) received by or due to him, from his current or former employer, for himself and his family, in
connection with his proceedings on leave to any place in India either during his employment or after the
retirement/termination of his employment.
"Family" means,-
(a) the spouse and children of the individual, and
(b) the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the Individual. In
case of children born after 1-10-1998, the exemption is available for only two surviving children and in case of birth of
multiple children after one child; the multiple children shall be regarded as one child

Amount of Exemption [Rule 2B]:

Situations- Exemption upto the amount not exceeding-
Journey by air Economy fare of national carrier by shortest route.
In case places are connected by rail and journey is 1 Class AC rail fare by the shortest route.
performed other than by air

If places are not connected by rail and -

(a) recognised transport system exists 1/deluxe class fare on such transport by shortest route.
(b) no recognised transport carrier exists 1" Class AC rail fare by the shortest route (as if the
journey had been performed by rail)
"The amount of exemption shall not exceed the amount actually incurred for such travel.

Claim of Exemption:
(a) The assessee can claim exemption for any two journeys in a block of 4 calendar years.
(b) The current blocks are: Ninth block 2022-2025
(c) Carry-over of Concession: In case no concession or only one concession is availed in the previous block, then the
assessee can claim one additional exemption in the first year of next block.

 Retrenchment Compensation can be exempted from tax [Section 10(108)]

Exemption in respect of Retrenchment Compensation [Section 10(108)]: Retrenchment Compensation received by an
assessee shall be exempt to the extent of least of the following-
(i) Actual amount received, or
(ii) Rs.5,00,000 or
(iii) 15 days' average pay x Every completed year of service or part thereof in excess of 6 months.
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 3 complete calendar months,
 in the case of weekly paid workman, in the 4 calendar weeks,
 in the case of daily paid workman, in the 12 full working days,
preceding the date on which the average pay becomes payable if the workman had worked for 3 complete calendar
months or 4 complete weeks or 12 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 food grains or other articles,
 any travel concession, and
 any commission payable on the promotion of sales or business or both.
However, it does not include-
(i) any bonus:
(ii) contribution to a retirement benefit scheme;
(iii) any gratuity payable on the termination of his service.

 Exemption in respect of compensation received on voluntary retirement/ separation

Exemption in respect of compensation received on voluntary retirement or separation [Section 10(10C)]:
Sec 10(10C) grants exemption to the employees who are in receipt of voluntary retirement receipts, subject to some
conditions-
(1) Eligible Employees: Only the employees of following undertakings are eligible -
(a) A public sector company,
(b) Any other company;
(c) An authority established under a Central/State or Provincial Act,
(d) A local authority,
(e) A co-operative society;
(f) A University established or incorporated under a Central/State or Provincial Act and an institute declared to be a
University by University Grants Commission,
(g) An Indian Institute of Technology,
(h) Institute of management as the Central Government may specify in this behalf through a notification in the Official
Gazette:
(i) Central or State Government; or
(j) An institution having importance throughout India or in any state as the Central Government may specify by
notification in the Official Gazette.
(2) Limit of Exemption: Least of the following is exempt-
(a) Actual amount received:
(b) ₹5, 00,000
The exemption shall be given even if the compensation is receivable in installments.

(3) Guidelines for claiming exemption [Rule 2BA]:

(a) the scheme applies to an employee who has completed 10 years of service or completed 40 years of age except in
case of employees of public sector Company,
(b) it applies to all employees including workers and executives except directors of a company or co-operative society;
(c) scheme has been drawn to result in overall reduction in the existing strength of the employees,
(d) the vacancy caused by the voluntary retirement or voluntary separation is not to be filled up:
(e) retiring employee is not employed in another company/concern belonging to same management:
(f) Amount of compensation does not exceed -
(i) 3 months x salary last drawn x completed year of service, or
(ii) Salary last drawn x Balance of months left before retirement or superannuation.
Note: Salary = Basic pay + DA (forming part of retirement benefits) + %-wise fixed commission on turnover.

(4) Exemption only once: If exemption has been allowed to an employee under this section in any assessment year, no
exemption shall be allowed to him in relation to any other assessment year.

(5) No exemption if relief availed u/s 89: Where any relief has been allowed to an 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 this section shall be allowed to him in relation to such, or any other,
assessment year.
Thus, relief under section 89 and exemption under this section cannot be availed of simultaneously. Further, once relief
is claimed under section 89, the right to claim exemption in respect of VRS compensation is lost forever.

 Exemption available in respect of tax on non monetary perquisites borne by the

employer on behalf of employee [Section 10(10CC)]
Exemption in respect of tax on non-monetary perquisites borne by the employer on behalf of employee [Section
10(10CC)]: This section provides the exemption to an employee in respect of the tax paid by his employer on his behalf
on the non-monetary perquisites (within the scope of Section 17(2)) received by such employee. Hence, such tax paid
shall not form part of the employee's gross salary.
Tax implication in hands of employer: Section 40(a)(v) disallows such expenditure in the hands of the employer.
Therefore, the tax so paid by the employer will not be deductible expenditure in his hands.
 TAX TREATMENT OF PROVIDENT FUNDS AND TAX RELIEF-
Tax treatment of various Provident Funds:

Tax incidence of SPF RPF URPF

(1) Employer's contribution Exempt Exempt upto 12% of Not taxable when the
Salary [note 1 & 2] contribution
(2) Employee's contribution Taxable Taxable Taxable

(3) Deduction u/s 80C on Available where an Available where an Not Available
employee's contribution employee exercises employee exercises the
the option of shifting option of shifting out of
out of the default tax the default tax regime
regime provided u/s 115BAC(1A)
115BAC(1A)

(4) Interest credited to PF Exempt Exempt upto interest Not taxable when interest is
calculated @9.5% p.a. credited

(5) Lump sum payment at Exempt 10(11) Exempt from tax in some Employer's contribution &
the time of retirement or cases. When not interest thereon: -
termination of service exempt provident fund Taxable as salary.
will be treated as an Relief can be claimed u/s
unrecognized fund 89.
from the beginning. Employee's own
contribution: Exempt, as
taxed earlier
Interest on employee's
contribution: Taxable as
'Income from Other
Sources'.

Note:
(1) Salary= Basic+ Dearness allowance, if the terms of employment so provide + percentage-wise fixed commission on
turnover.
(2) The amount or the aggregate of amounts of any contribution made to the account of the assessee by the
employer-
(a) in a recognized provident fund;
(b) in the scheme referred to in Section 80CCD(1); and
(c) in an approved superannuation fund,
to the extent it does not exceed 7,50,000 in a previous year is exempt from tax.

 Tax Incidence of approved superannuation funds

(1) Employer's contribution to the fund- Exempt if the amount or the aggregate of amounts of any contribution made to
the account of the assessee by the employer in a RPF, NPS scheme and in an approved superannuation fund, to the
extent it does not exceed Rs. 7,50,000 in a previous year.

(2) Employee's contribution - qualifies for deduction under section 80C.

(3) Interest credited to the employee's account - Exempt. However, the annual accretion by way of interest, dividend or
any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme
referred above to the extent it relates to the contribution which is included in total income in any previous year
computed in such manner as may be prescribed.

(4) Exemption of payment from the fund [Section 10(13)]: Section 10(13) gives exemption in respect of payments from
an approved superannuation fund if they are made.
(a) to legal heirs on the death of the beneficiary, or
(b) to an employee in substitution of or in commutation of an annuity on his retirement at or after a specified age or if
he becomes incapable prior to his retirement, or
(c) in form of refund of contribution on death of beneficiary; or
(d) in the form of refund of contribution to an employee leaving the service in circumstances other than those
mentioned in (c) above, to the extent the payment does not exceed contribution made prior to commencement of this
Act and interest thereon; or
(e) by way of transfer to the account of the employee under a pension scheme referred to in section 80CCD and notified
by the Central Government.

 Relief calculation when salary is paid in arrears or in advance

The provisions relating to tax relief under Section 89 are as under:

(A) Relief when available: Section 89 read with Rule 21A grants relief to the assessee who receives -
(a) salary, being paid in arrears or in advance, or
(b) salary for more than 12 months in any one financial year, or
(c) profits in lieu of salary under section 17(3); or
(d) family pension as referred to in Section 57(iia) being paid in arrears,
due to which his total income is assessed at a rate higher than that at which it should have been assessed.

(B) Calculation of relief: The admissible relief will be calculated as per the following steps -
(i) Calculate the tax payable on the total income, including the additional salary, of the previous year in which
the same is received.
(ii) Calculate the tax payable on the total income, excluding the additional salary of the previous year in which
the same is received.
(iii) Find out the difference between the tax at (1) and (2)
( iv) Compute tax on total income after including the additional salary in the previous year to which such salary relates
(v) Compute tax on total income after excluding the additional salary in the previous year to which such salary relates
(6) Find out the difference between tax at (4) and (5).
(7) Relief under section 89= Tax computed at (iii) - Tax computed at (vi).

(C) No relief, if exemption claimed u/s 10(10C) in respect of VRS compensation: No relief shall be granted under this
section in respect of any amount received or receivable by an assessee on his voluntary retirement or termination of
his service under Voluntary Retirement or Separation Scheme if an exemption u/s 10(10C) has been claimed in respect
of such or any other assessment year.