A Comparative Analysis of "Profits in Lieu of Salary" Under the New Tax Regime: Clause 18 of Income Tax Bill, 2025 vis-a-vis Section 17(3) of Income-tax Act, 1961.

Clause 18 Profits in lieu of salary.

Income Tax Bill, 2025

1. Introduction

The Income Tax Bill, 2025, proposes significant changes to the definition and scope of "profits in lieu of salary" through Clause 18, which aims to replace the existing Section 17(3) of the Income-tax Act, 1961. This analysis examines the key modifications and their implications.

2. Structural Changes

2.1 Organization and Format

The new Clause 18 presents a more organized structure with clear subsections and categorization. The provision is split into two main subsections: 

• Subsection (1): Defines what constitutes "profits in lieu of salary"
• Subsection (2): Specifically lists exclusions through Schedule references

3. Detailed Analysis of Key Changes

3.1 Compensation for Employment Changes

Original [Section 17(3)(i)]:

• Combined provision for termination and modification of employment terms

New [Clause 18(1)(a)]:

• Splits into two distinct sub-clauses: (i) Termination of employment, (ii) Modification of terms and conditions
• Provides greater clarity and specific treatment for each scenario

3.2 Pre and Post-Employment Payments

Original [Section 17(3)(iii)]:

• Introduced by Finance Act, 2001
• Covered amounts received before joining or after cessation

New [Clause 18(1)(b)]:

• Maintains similar coverage but with improved structure
• Specifically addresses lump-sum payments
• Provides clearer distinction between pre and post-employment payments

3.3 Payments from Employer and Funds

Original [Section 17(3)(ii)]:

• Complex structure with multiple cross-references to Section 10
• Included Keyman insurance policy provisions within the main clause

New [Clause 18(1)(c)]:

• Clearer three-part structure:
• Payments from employer/former employer
• Payments from provident/other funds
• Keyman insurance policy payments
• Removes direct cross-references to exemptions, replacing with Schedule references

4. Notable Changes in Exclusions

4.1 Schedule-based Exclusions

New [Clause 18(2)]:

• Introduces a schedule-based system for exclusions
• References specific items in Schedule II and Schedule III
• Provides clearer framework for understanding exemptions

4.2 Removal of Complex Cross-references

• Eliminates multiple references to Section 10 clauses
• Simplifies understanding of excluded payments
• Creates more accessible format for taxpayers and practitioners

5. Practical Implications

5.1 For Taxpayers

• Clearer understanding of what constitutes profits in lieu of salary
• Easier identification of taxable and non-taxable components
• Simplified reference system through schedules

5.2 For Employers

• Better guidance for classification of payments
• Reduced complexity in determining taxable components
• Clearer framework for compliance

6. Conclusion

Clause 18 represents a significant improvement in terms of clarity, structure, and accessibility compared to Section 17(3). The new provision streamlines the definition of "profits in lieu of salary" while maintaining its essential scope.

 

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Full Text:

Clause 18 Profits in lieu of salary.

 

Dated: 27-2-2025