Sub-section (1) gives an inclusive definition of "profits in lieu of salary". Clause (a) brings in compensation due to or received from an employer or former employer at or in connection with termination of employment or modification of its terms and conditions. Clause (b) brings in any amount due to or received, in lump sum or otherwise, from any person either before joining employment with that person or after cessation of employment with him. Clause (c) brings in any payment due to or received from an employer or former employer; from a provident or other fund, to the extent it does not consist of the assessee's own contributions or interest on them; and any sum received under a Keyman insurance policy as defined in Schedule II (Note 1), including bonus allocated on it.
Sub-section (2) carves four categories out of the clause (c) limb alone: a payment referred to in Schedule II (Table: Sl. Nos. 3, 4 and 8) or Schedule III (Table: Sl. No. 11).
Why it is there
Employment income does not stop at the payslip. Amounts paid to buy out a contract, compensate for a variation of terms, secure a joining, or settle after the relationship has ended are economically salary, and without this section they would be argued to be capital receipts outside the head. The definition is inclusive, so it widens rather than confines the ordinary meaning.
Who it applies to
An employee receiving compensation on termination or on a change in the terms of employment
A former employee receiving a payment after cessation of employment
A person receiving a joining amount before taking up employment with the payer
A member of a provident or other fund receiving a payment from it
A person receiving a sum under a Keyman insurance policy
What this means in practice
The reach of clause (b) is the point that catches people: the payer need not be an employer at the time of payment and the recipient need not yet be an employee. In clause (c) the fund limb is a net figure — only the part that is not the assessee's own contributions or interest on them is caught. Sub-section (2) does not qualify the whole definition; it operates only on clause (c), so a payment excluded by one of the four Schedule entries can still be caught by clause (a) or (b).
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
An individual leaves under a settlement paying Rs. 30 lakh described as compensation for early termination, and separately receives Rs. 8 lakh from a prospective employer before joining. The Rs. 30 lakh is caught by sub-section (1)(a)(i); the Rs. 8 lakh by sub-section (1)(b)(i), even though no employment had begun when it was paid. Neither is a capital receipt merely because it is a one-off lump sum.
Where you meet this section
It shows up on a Form 16 and in the salary schedule of the return when a severance, joining bonus or fund withdrawal is being characterised, and in an assessment where the assessee has treated such a receipt as capital or exempt.
The words themselves
any amount due to, or received, whether in lump sum or otherwise, by any assessee from any person— (i) before his joining any employment with that person; or (ii) after cessation of his employment with that person
Section 18(1)(b), Income-tax Act, 2025.
What people get wrong
Treating a termination payment as a capital receipt outside salary. Sub-section (1)(a)(i) makes it profits in lieu of salary by definition.
Assuming a joining bonus paid before employment starts is outside the head. Sub-section (1)(b)(i) expressly covers it.
Bringing the whole provident fund payment in. Sub-section (1)(c)(ii) includes it only to the extent it is not the assessee's own contributions or interest on them.
Applying the sub-section (2) exclusions across the definition. They are worded as exclusions from the payment referred to in sub-section (1)(c) only.
What this replaced
The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.
17 - “Salary”, “perquisite” and “profits in lieu of salary” defined
A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.
Circular No. 3/2025 — Income tax deduction from salaries during the financial year 2024 25 under section 192 of the income tax act 1961 2025-02-20
Circular No. 2/2010 — Section 115WM of the Income-tax Act, 1961 - Fringe Benefit Tax - Chapter XII-H not to apply after a certain date - Adjustment of ‘ 2010-01-29
Circular No. 8/2005 — CIRCULAR FINANCE ACT, 2005 - FBT Finance Act, 2005 - Explanatory Notes on the Provisions relating to Fringe Benefit Tax 2005-08-29
Circular No. 761 — 1184. Clarifications regarding use of Form No. 16 for pensioners where pensioners are drawing their pensions through banks 1998-01-13
Circular No. 710 — 202. Taxability of the perquisite on shares issued to employees at less than market price 1995-07-24
Circular No. 701 — 18. Taxability of allowances received by persons having income under the head ‘Salaries’ 1995-03-23
Circular No. 644 — 371. Whether provision of food or beverages in places other than place of work in respect of low-paid employees can be treated as 1993-03-15
Circular No. 451 — Clarifications on issues relating to effect of filing higher estimates of income for advance tax purposes on assessments for earl 1986-02-17
Circular No. 442 — 1512. Appointment of estate duty valuers for different categories of assets and scale of charges for their remuneration - Notifica 1985-12-10
Circular No. 431 — 624. Relief in case of encashment of leave salary by an employee while in service - Whether admissible 1985-09-12
Circular No. 331 — Section 89 l Relief When Salary ETC., Is Paid in Arrears or in Advance 1982-03-22
Circular No. 293 — 181. Pension received by erstwhile officials of United Nations - Whether exempt from tax in view of section 2 of UN (Privileges an 1981-02-10
Circular No. 196 — 946. Whether tax is not to be deducted at source from conveyance allowance where disbursing authority is satisfied that conveyance 1976-03-31
Circular No. 189 — 276. Development rebate reserve in the case of industrial undertakings in which there is Government participation and where there 1976-01-30
Circular No. 153 — Section 2(38) l Recognized Provident Fund 1974-11-30
Circular No. 130 — Section 17(2)/RULE 3 l Perquisite and ITS Valuation 1974-03-16
Circular No. 122 — Rule 3(g) of Income-tax Rules - Valuation of perquisibte on account of services of household servants 1973-10-19
Circular No. 32 — Limit on allowance in respect of benefit, amenity or perquisite under clause (c)(iii)/clause (a)(v) - Reimbursement of certain exp 1969-10-29
A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.
Notification No. 94 — Income-tax (Thirteenth Amendment) Rules, 2009 - Substitution of rule 3 and Insertion of rule 40F 2009-12-18
Notification No. 70 — Amendment in Electronic Furnishing of Return of Income Scheme, 2007 2009-09-22
Notification No. 271 — Income-tax (Fourteenth Amendment) Rules, 2007 - Amendments in rule 3 - Valuation of perquisites 2007-11-07
Notification No. 003 — S.O. (E).-In exercise of the powers conferred by section 295 read with rule 3 of Part A of the Fourth Schedule to the Income-tax A 2007-01-15
Notification No. 68 — Amendment of the Income-tax Rules under section 17 of the Income-tax Act, 1961 2005-02-28
Notification No. 291 — Amendment of the Income-tax Rules under section 3 of the Income-tax Act, 1961 2004-12-07
Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 18. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.
V.M. Salgaocar & Bros P Ltd v CITSupreme CourtHelps taxpayertagged s.17(2) For old years, was an interest-free loan from my employer taxable as a perquisite?
Manjeet Singh Chawla v Dy CIT (TDS)High CourtHelps taxpayertagged s.17(2) If the payment for the fall in option value is not salary, is it capital gains?
Nishithkumar Mukeshkumar Mehta v Dy CITHigh CourtHelps departmenttagged s.17(2) Is compensation for the fall in value of stock options taxable as salary if I keep the options?
Ravi Kumar Sinha v CITHigh CourtHelps taxpayertagged s.17(2) I was allotted shares under an employee stock purchase scheme but they carry a lock-in and I cannot sell them. Can the perquisite be valued at the…
Sanjay Baweja v Dy CITHigh CourtHelps taxpayertagged s.17(2)(vi) My employer paid me for the fall in value of options I never exercised. Is that a perquisite?
ACIT v Subhodh MenonITATHelps taxpayertagged s.17 I subscribed for less than my share of a rights issue. Can the AO still tax the discount?
Pramod Kumar Jain v DCITITATHelps taxpayertagged s.17(2)(vi) The company bought back my vested options before I exercised them. Salary or capital gains?
Rajesh R Hemrajani v ITOITATHelps taxpayertagged s.17(2)(vi) When I sell esop shares, is my cost of acquisition under section 49(2AA) the fair market value used for the perquisite even if that perquisite was…
What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.