Section 18
Section 18: profits in lieu of salary
Section 18 defines "profits in lieu of salary" - amounts an employee (or ex-employee, or future employee) receives that are connected to employment but aren't ordinary salary as such, most commonly compensation on termination or payments made before joining or after leaving a job.
This explanation is AI-assisted and pending review by our CA/CS team. It is general information, not professional advice - always cross-check against the bare law text above or talk to our tax team for guidance specific to your situation.
What is included
Section 18(1) treats the following as "profits in lieu of salary":
- Compensation due to or received by an assessee from an employer or former employer, in connection with the termination of employment or a modification of its terms and conditions
- Any amount due to or received (lump sum or otherwise) by an assessee from any person, before joining employment with that person, or after ceasing employment with that person
- Any payment due to or received by an assessee from an employer/former employer, or from a provident or other fund, to the extent it does not consist of the employee's own contributions or interest on those contributions
- Any sum received under a Keyman insurance policy (as defined in Schedule II, Note 1), including bonus allocated on such a policy
What is excluded
Section 18(2) excludes certain payments referred to in Schedule II (Table entries at serial numbers 3, 4 and 8) and Schedule III (Table entry at serial number 11) from being treated as "profits in lieu of salary" under section 18(1)(c).
Frequently asked questions
Is a termination or severance payment taxable?
Compensation received from an employer/former employer in connection with termination of employment (or a change in its terms) is included as "profits in lieu of salary" under Section 18(1)(a), and is therefore chargeable to tax as salary income, subject to any applicable Schedule II/III exclusions.
Is a joining bonus paid before I start work taxable as salary?
Yes - Section 18(1)(b) includes amounts due to or received by an assessee from a person before joining employment with that person.
Related sections
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Talk to our tax team about this sectionLast updated 9 September 2026