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.
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