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Income Tax Laws – I

Notes 24. A “remote area” means an area located at least 80 kilometres away from a town having a
population not exceeding 20,000 as per the latest published all-India census.

7.7 Profits in Lieu of or in Addition to Salary

Under this the following items are included:
1. The amount of any compensation due to or received by an assessee from the employer or
former employer at or in connection with the termination of his employment.

Notes The ‘termination of employment’ means retirement, premature termination of
employment, termination by death or voluntary resignation.
Generally, under the Income tax Act, the income that is chargeable to tax is only a receipt which
is revenue in nature; receipts of a capital nature are not chargeable to tax but this provision
constitutes an exception to this rule because compensation received by an employee for
termination of his employment would be a capital receipt since it is received in replacement of
the sources of income itself. Still it is chargeable to tax because of the specific provision in the
Act.

However, relief under Section 89(1) would be available to the assessee in cases where he gets
money which represents a profit in lieu of salary; the amount of any compensation due to or
received by any assessee from his employer in connection with the modification of the terms
and conditions relating to employment.

Example: Where an employer wants to cut down the salary payable to the employee,
the lump sum paid to compensate the employee shall be treated as profits in lieu of salary.

In the same way, where the remuneration for services is paid at the end of the period of
employment or a lump sum remuneration is paid at the beginning of employment for a
number of years, such payment shall be treated as profits in lieu of salary.
2. 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.
3. Any payment other than the following payment due to or received by 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 contribution by the assessee or interest on such contributions by the
assessee or interest on such contributions or any sum under Keyman Insurance Policy.

7.7.1 Gratuity

‘Gratuity’ is a retirement benefit. Gratuity Act, 1972 act envisages in providing retirement
benefit to the workman who have rendered long and unblemished service to the
employer. Gratuity is a reward for long and meritorious service. Earlier, it was not compulsory
for an employer to reward his employee at the time of his retirement or resignation. But in 1972
the government passed the Payment of Gratuity Act that made it mandatory for all employers
with more than 10 employees to pay gratuity.
Applicability of the Act: The act provides for the payment of gratuity to workers employed in
every factory, mine, oil field, plantation, port, railways, shop & Establishments or educational
institution employing 10 or more persons on any day of the proceeding 12 months. A shop or

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