Section 18 catches receipts that resemble salary in substance but are not labelled as such — termination compensation, golden handshake, retrenchment compensation, ex-gratia, keyman-insurance receipts, sign-on bonus from prospective…
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ITA 2025 · Section 18
Section 18 — PROFITS IN LIEU OF SALARY
Section 18 catches receipts that resemble salary in substance but are not labelled as such — termination compensation, golden handshake, retrenchment compensation, ex-gratia, keyman-insurance receipts, sign-on bonus from prospective employer, etc. The carve-out for gratuity / leave-encashment / commuted pension is preserved through Schedule III + ss. 173-176 (1961 ss. 10(10), 10(10A), 10(10AA)).
STATUTORY ARCHITECTURE
Section 18 is the anti-avoidance complement to s. 16 — it ensures that what cannot be classified as salary, perquisite, or allowance is nonetheless captured under the Salaries head if the employer-employee nexus is its source. Three principal limbs: (i) Termination compensation — voluntary OR involuntary, lump-sum or instalment; (ii) Other former-employer payments (not gratuity / commuted pension carve-outs); (iii) Pre-employment / post-cessation receipts — sign-on bonuses, non-compete consideration FROM employer (distinguish from non-compete consideration IN PGBP under s. 26(viii)).
JUDICIAL EVOLUTION — Termination Compensation
CIT v. K.R. Krishnamurthy Iyer, (1968) 67 ITR 145 (Ker HC) — voluntary termination compensation is taxable as 'profits in lieu' even where the employer was not statutorily bound to pay; the substance is salary-equivalent.
JUDICIAL EVOLUTION — Non-Compete Consideration Distinction
The historic position from
CIT v. Inder Pal Sahgal, (1985) 25 Taxman 41 (Del HC) treated post-employment non-compete consideration as capital receipt; subsequently nuanced by FA 2002 by inserting 1961 s. 28(va) (now s. 26(viii) of 2025 Act) which classifies certain non-compete receipts as PGBP. Where non-compete is paid BY EMPLOYER for restraint extending into post-employment period, characterisation is fact-sensitive — examine whether (a) consideration relates to the employment ending (s. 18 'profits in lieu') or (b) consideration relates to standalone non-compete arrangement (PGBP s. 26(viii)).
JUDICIAL EVOLUTION — Voluntary Retirement Compensation
Compensation under a CBDT-approved Voluntary Retirement Scheme is exempt up to ₹5L (Schedule III + s. 173 of 2025 Act / 1961 s. 10(10C)) — beyond ₹5L, falls under s. 18 as profits in lieu and is taxable. The scheme MUST be CBDT-approved per Income-tax Rules, 2026 r. 14 (preserved from 1962 r. 2BA); manual / non-approved VRS forfeits the exemption entirely.
DEPARTMENTAL PRACTICE
Form 16 Part B reports profits-in-lieu separately from salary / perquisite. For VRS receipts > ₹5L, employer must apply TDS u/s 192 (s. 392 of 2025 Act) at slab rate on the excess; relief u/s 157 (1961 s. 89(1)) available — file Form 10E. Section 18 receipts attract relief u/s 157 — spread over notional years to mitigate slab-bunching.
PLANNING NOTES & LITIGATION DEFENCE
(i) For VRS / golden handshake, optimise Schedule III ₹5L (VRS) / ₹20L (gratuity) / ₹25L (leave encashment) caps. Once exceeded, falls under s. 18 — claim s. 157 relief via Form 10E. (ii) For non-compete consideration paid post-termination, evaluate (a) whether it falls under s. 26(viii) (PGBP) or (b) genuinely a capital receipt for sterilisation of source. The boundary is fact-sensitive — board minute / engagement letter / consideration-rationale documentation is critical. (iii) For sign-on bonuses, ensure repayment-clawback documentation — if employee leaves before vesting, the clawed-back amount is reversed in subsequent year's Form 16 (negative perquisite). (iv) For retirement benefits — gratuity (s. 173 — ₹20L cap), leave encashment (s. 174 — ₹25L cap from FA 2023), commuted pension (s. 176 — fully exempt for govt; partially for non-govt).
CROSS-REFERENCES