This paper presents a new data compression concept, “on-board processing,” for infrared astronomy, where space observatories have limited processing resources. The proposed approach has been developed and tested for the PACS camera from the European Space Agency (ESA) mission, Herschel. Using lossy and lossless compression, the presented method offers high compression ratio with a minimal loss of potentially useful scientific data. It also provides higher signal-to-noise ratio than that for standard compression techniques. Furthermore, the proposed approach presents low algorithmic complexity such that it is implementable on the resource-limited hardware. The various modules of the data compression concept are discussed in detail.