Section 18 of the Income-tax Act, 2025 — Profits in Lieu of Salary

In plain language

What Section 18 actually says

Section 18 of the Income-tax Act, 2025 (in force from 1 April 2026) defines "profits in lieu of salary". It is the successor to Section 17(3) of the old Income-tax Act, 1961 — the language has been re-drafted and simplified, but the concept is the same. The purpose of this section is to make sure that money an employee receives because of the employment relationship — even if it is not called "salary" and even if it is received before joining or after leaving — is still taxed under the head "Salaries" (read with the charging section, Section 15).

In plain words: your employer cannot re-label a salary-type payment as "compensation", "ex-gratia", "joining bonus" or "settlement" to escape tax. If it flows from the job, it is caught here.

What is included as "profits in lieu of salary"

• Termination / modification compensation: Any compensation due to or received from an employer or former employer at, or in connection with, the termination of employment or the modification of the terms and conditions of employment (for example, a severance package or a pay-out for accepting reduced responsibilities).
• Pre-joining and post-cessation payments: Any amount due to or received from any person before joining employment with that person, or after ceasing employment — this covers joining bonuses (sign-on bonus) and non-compete fees paid after you leave.
• Employer / fund payments and Keyman insurance: Any payment from an employer or former employer, or from a provident fund or other fund (other than your own contribution and interest on it), and any sum received under a Keyman Insurance Policy, including any bonus on such policy.

What is specifically excluded (Section 18(2))

Section 18(2) carves out payments that are dealt with elsewhere as exempt or specially treated. The excluded items are those covered by Schedule II (Sl. No. 3, 4 and 8) and Schedule III (Sl. No. 11) of the 2025 Act. In practical terms these correspond to the old exemptions such as:

• Gratuity (old Section 10(10)).
• Commuted pension (old Section 10(10A)).
• Retrenchment compensation — exempt up to the lower of the amount under the Industrial Disputes Act, 1947 or ₹5,00,000 (old Section 10(10B)).
• Payments from a recognised provident fund / approved superannuation fund to the extent exempt.

Note that VRS (voluntary retirement) receipts are exempt up to ₹5,00,000 under the corresponding provision (old Section 10(10C)); anything above these caps falls back into taxable salary.

Who it applies to

Section 18 applies to every salaried individual — private-sector employees, public-sector employees, directors who are employees, and even people who have not yet joined or have already left a job. The key test is whether an employer–employee relationship exists or existed. If there is no such relationship (say, a payment to an independent professional), it is business/other-source income, not salary.

How it fits with the other salary sections

• Section 15 — charges salary to tax and fixes the year of taxability (due or received basis).
• Section 16 — the inclusive definition of "salary"; it specifically includes profits in lieu of salary.
• Section 17 — perquisites (non-cash benefits).
• Section 19 — deductions from salary (standard deduction, professional tax, etc.).

Practical implications

• TDS applies: The employer must deduct tax at source on these payments (the old Section 192 mechanism continues in the 2025 Act), so the money usually reaches you net of tax.
• Full slab-rate taxation: The taxable portion is added to total income and taxed at your normal slab rates. There is no separate concessional rate.
• Keep documents: To claim any exemption (gratuity, retrenchment, VRS), preserve the settlement letter, computation and Form 16 — the exemption is not automatic.
• Relief for arrears/compensation: Lump-sum compensation can push you into a higher slab; relief under the successor to Section 89 (spreading over years) may reduce the burden.