My client received a payment from a former employer that is not gratuity, not retrenchment compensation and not under any VRS. The Assessing Officer says it is profits in lieu of salary. What exactly does s.17(3) cover, and what does it not?
Section 17(3) has three limbs. Clause (i) covers the amount of 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 its terms and conditions. Clause (ii) covers any payment due to or received from an employer, a former employer or a provident or other fund, but expressly excludes any payment referred to in clause (10), (10A), (10B), (11), (12), (13) or (13A) of section 10, and excludes so much of the payment as consists of the employee's own contributions or interest on them or any sum received under a Keyman insurance policy including bonus allocated on it. Clause (iii) covers any amount due to or received, whether in lump sum or otherwise, by any assessee from any person before his joining any employment with that person or after cessation of his employment with that person.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2025-04-01, reported as Income-tax Act, 1961, s.17(3), as printed on the departmental Year 2025 and Year 2024 (No. 1) pages. It bears on section 17(3), section 17(3)(i), section 17(3)(ii), section 17(3)(iii), section 10(10), section 10(10A), section 10(10B), section 10(11), section 10(12), section 10(13), section 10(13A), section 10(10D), section 89 of the Income Tax Act 1961, in Salary & Perquisites and How Tax Law Is Read matters.
The section is the collecting provision for everything paid around the edges of an employment, and its structure decides most disputes. Clause (i) is about compensation at or in connection with termination or the modification of terms — the words "in connection with" are wide, and a payment need not be under the contract to be caught. Clause (ii) is the fund limb and it is drafted as an inclusion with exclusions: the seven cross-referenced clauses of section 10 are carved out, which is why a payment that falls squarely inside s.10(10), s.10(10A), s.10(10B), s.10(11), s.10(12), s.10(13) or s.10(13A) is not brought back in by this route, and why the correct order of analysis is to test the section 10 clause first. Within clause (ii) the further exclusion of "contributions by the assessee or interest on such contributions" is what keeps the employee's own money out of the charge. Clause (iii) is the one practitioners forget: it reaches an amount received from a person BEFORE joining any employment with him and AFTER cessation of employment with him, and it is not limited to compensation — the words are "any amount due to or received, whether in lump sum or otherwise". That is the limb the Delhi High Court construed in CIT v Pritam Das Narang, already in this library, where no employment had ever commenced. Note finally the interaction with s.89: the section 89 relief is available where a payment which under s.17(3) is a profit in lieu of salary causes the total income to be assessed at a higher rate, so a clause (i) termination payment spread over years of service is a s.89 case as well as a s.17(3) case.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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As printed on the Year 2025 departmental page, sub-section (3) of section 17 reads: "profits in lieu of salary" includes— (i) 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 or the modification of the terms and conditions relating thereto; (ii) any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause (13A) of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation.—For the purposes of this sub-clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in clause (10D) of section 10; (iii) 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. The Year 2024 (No. 1) page prints the sub-section in identical words.
"Profits in lieu of salary" includes, first, compensation due to or received from an employer or former employer at or in connection with the termination of employment or the modification of its terms; second, any payment due to or received from an employer, former employer or a provident or other fund, other than a payment referred to in clause (10), (10A), (10B), (11), (12), (13) or (13A) of section 10, and only to the extent it does not consist of the assessee's own contributions, interest on them, or a sum received under a Keyman insurance policy including bonus allocated on it; and third, any amount due to or received, in lump sum or otherwise, from any person before joining any employment with that person or after cessation of employment with that person.
Not applicable — this is a statement of statutory text taken from two departmental editions of section 17. No judicial reasoning is involved.
(iii) 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.
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Handle my notice → Ask a CA on WhatsAppSection 17(3) has three limbs. Clause (i) covers the amount of 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 its terms and conditions. Clause (ii) covers any payment due to or received from an employer, a former employer or a provident or other fund, but expressly excludes any payment referred to in clause (10), (10A), (10B), (11), (12), (13) or (13A) of section 10, and excludes so much of the payment as consists of the employee's own contributions or interest on them or any sum received under a Keyman insurance policy including bonus allocated on it. Clause (iii) covers any amount due to or received, whether in lump sum or otherwise, by any assessee from any person before his joining any employment with that person or after cessation of his employment with that person. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 17(3), section 17(3)(i), section 17(3)(ii), section 17(3)(iii), section 10(10), section 10(10A), section 10(10B), section 10(11), section 10(12), section 10(13), section 10(13A), section 10(10D), section 89 of the Income Tax Act 1961. It is reported as Income-tax Act, 1961, s.17(3), as printed on the departmental Year 2025 and Year 2024 (No. 1) pages. The section is the collecting provision for everything paid around the edges of an employment, and its structure decides most disputes. Clause (i) is about compensation at or in connection with termination or the modification of terms — the words "in connection with" are wide, and a payment need not be under the contract to be caught. Clause (ii) is the fund limb and it is drafted as an inclusion with exclusions: the seven cross-referenced clauses of section 10 are carved out, which is why a payment that falls squarely inside s.10(10), s.10(10A), s.10(10B), s.10(11), s.10(12), s.10(13) or s.10(13A) is not brought back in by this route, and why the correct order of analysis is to test the section 10 clause first. Within clause (ii) the further exclusion of "contributions by the assessee or interest on such contributions" is what keeps the employee's own money out of the charge. Clause (iii) is the one practitioners forget: it reaches an amount received from a person BEFORE joining any employment with him and AFTER cessation of employment with him, and it is not limited to compensation — the words are "any amount due to or received, whether in lump sum or otherwise". That is the limb the Delhi High Court construed in CIT v Pritam Das Narang, already in this library, where no employment had ever commenced. Note finally the interaction with s.89: the section 89 relief is available where a payment which under s.17(3) is a profit in lieu of salary causes the total income to be assessed at a higher rate, so a clause (i) termination payment spread over years of service is a s.89 case as well as a s.17(3) case. If it applies to you, the first step is this: Work in the right order. Test the receipt against the relevant clause of section 10 FIRST — (10), (10A), (10B), (11), (12), (13) or (13A) — because clause (ii) of s.17(3) carves those out expressly.
As printed on the Year 2025 departmental page, sub-section (3) of section 17 reads: "profits in lieu of salary" includes— (i) 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 or the modification of the terms and conditions relating thereto; (ii) any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause (13A) of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation.—For the purposes of this sub-clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in clause (10D) of section 10; (iii) 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. The Year 2024 (No. 1) page prints the sub-section in identical words. The matter was decided on 2025-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. "Profits in lieu of salary" includes, first, compensation due to or received from an employer or former employer at or in connection with the termination of employment or the modification of its terms; second, any payment due to or received from an employer, former employer or a provident or other fund, other than a payment referred to in clause (10), (10A), (10B), (11), (12), (13) or (13A) of section 10, and only to the extent it does not consist of the assessee's own contributions, interest on them, or a sum received under a Keyman insurance policy including bonus allocated on it; and third, any amount due to or received, in lump sum or otherwise, from any person before joining any employment with that person or after cessation of employment with that person.
Not applicable — this is a statement of statutory text taken from two departmental editions of section 17. No judicial reasoning is involved. In the words reproduced by the source cited on this page: "(iii) 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."
It was decided by the CBDT Circulars & Instructions on 2025-04-01 and is reported as Income-tax Act, 1961, s.17(3), as printed on the departmental Year 2025 and Year 2024 (No. 1) pages. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 17(3), section 17(3)(i), section 17(3)(ii), section 17(3)(iii), section 10(10), section 10(10A), section 10(10B), section 10(11), section 10(12), section 10(13), section 10(13A), section 10(10D), section 89, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. "Profits in lieu of salary" includes, first, compensation due to or received from an employer or former employer at or in connection with the termination of employment or the modification of its terms; second, any payment due to or received from an employer, former employer or a provident or other fund, other than a payment referred to in clause (10), (10A), (10B), (11), (12), (13) or (13A) of section 10, and only to the extent it does not consist of the assessee's own contributions, interest on them, or a sum received under a Keyman insurance policy including bonus allocated on it; and third, any amount due to or received, in lump sum or otherwise, from any person before joining any employment with that person or after cessation of employment with that person. It arises in Salary & Perquisites and How Tax Law Is Read matters, on section 17(3), section 17(3)(i), section 17(3)(ii), section 17(3)(iii), section 10(10), section 10(10A), section 10(10B), section 10(11), section 10(12), section 10(13), section 10(13A), section 10(10D), section 89 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For a termination payment, ask whether it is compensation "at or in connection with" termination or the modification of terms. That is clause (i), and the connection need not be contractual. For a payment out of a fund, strip out the employee's own contributions and interest on them before computing the charge; clause (ii) excludes them in terms. If money was received from a person before any employment with that person began, or after employment with that person ceased, look at clause (iii) — and read CIT v Pritam Das Narang, which this library holds, before conceding. Where a clause (i) payment relates to services over several years, consider s.89 relief alongside; s.89 expressly names a payment which under s.17(3) is a profit in lieu of salary. Do not treat a Keyman insurance receipt in the employee's hands as caught by clause (ii); the clause excludes any sum received under a Keyman insurance policy including bonus allocated on it, and the Explanation takes the meaning of that expression from s.10(10D).
Still good law. Two departmental editions a year apart print sub-section (3) in identical words, which is the best evidence obtainable on this pass that it is unchanged for tax years up to AY 2026-27. No Finance Act text was retrieved and no amendment footnote against sub-section (3) could be read, so its legislative history is not established here and no insertion date is stated for any clause. I did not carry out any check of judicial treatment of s.17(3) beyond noting the decisions this library already holds. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
SOURCING. Sub-section (3) of section 17 was transcribed in full this pass from https://incometaxindia.gov.in/w/section-17-64, which printed the Act name "Income-tax Act, 1961", the heading "'Salary', 'perquisite' and 'profits in lieu of salary' defined" and the stamp "Year: 2025", and independently from https://incometaxindia.gov.in/w/section-17-62 (Year: 2024 (No. 1)). The two transcriptions are word-for-word identical, including the Explanation to clause (ii) and sub-clauses (A) and (B) of clause (iii). NEITHER PAGE CARRIED AN AMENDMENT FOOTNOTE against sub-section (3), so I have NOT dated any part of it and make no statement about when clause (iii) was inserted or what preceded it; a later pass should establish that from a Finance Act text or from a judgment. WHAT THIS ENTRY DOES NOT DO: it does not decide the line between a taxable termination payment and a capital receipt, because that is decided case by case and this library already holds the decisions — CIT v Pritam Das Narang, CIT v Deepak Verma, CIT v Smt. Rani Shankar Mishra and SAIL DSP VR Employees Association 1998 v Union of India are all in HAVE-B90.txt. What was missing was the text of the provision itself, and that is what is supplied here. The connection drawn with s.89 comes from the words of s.89 as read this pass on https://incometaxindia.gov.in/w/section-89-12 (Year: 2013), which names "a payment which under the provisions of clause (3) of section 17 is a profit in lieu of salary". 'decided_on' is a LABELLED PLACEHOLDER set to the start of the tax year matching the Year 2025 departmental edition. 'bench' and 'favours' are inapplicable to a statutory entry. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
"Profits in lieu of salary" includes, first, compensation due to or received from an employer or former employer at or in connection with the termination of employment or the modification of its terms; second, any payment due to or received from an employer, former employer or a provident or other fund, other than a payment referred to in clause (10), (10A), (10B), (11), (12), (13) or (13A) of section 10, and only to the extent it does not consist of the assessee's own contributions, interest on them, or a sum received under a Keyman insurance policy including bonus allocated on it; and third, any amount due to or received, in lump sum or otherwise, from any person before joining any employment with that person or after cessation of employment with that person.
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