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Individuals employed in an organisation or a business enterprise are paid salaries for the services they render during their employment. Section 17(1) of the Income Tax Act defines the term salary and explains, in detail, the various kinds of monetary and non-monetary benefits that are classified as salary. Here is everything you need to know about section 17(1).
What is Section 17(1) of the Income Tax Act?
Section 17(1) of the Income Tax Act defines the term salary as a payment in cash, kind, or a non-monetary benefit that an employee gets from their employer. If any compensation that an employee receives from their employer is classified as salary as per section 17(1) of the Income Tax Act, it would be taxable in India under the heading ‘Income from Salary’. Also Read: Salary Structure & Salary Breakup: What is it & Its Components
What is a Salary As Per Section 17(1) of the Income Tax Act?
As per section 17(1) of the Income Tax Act, the following monetary and non-monetary compensation that an employee receives from their employer is classified as salary.
- Compensation for terminating employment or modifying the terms of employment.
- Employer’s contribution portion along with interest from an unrecognised provident or superannuation fund.
- Keyman insurance policy payment, including the bonus component of the policy.
- Payment received by the employee before formally joining employment or after ceasing employment.
- Wages Money that an employer pays to their employees for the services they render under contract is termed wages and includes components such as basic pay, allowances, and bonuses.
- Perquisites Perquisites, also known as perks, are benefits that employees receive in addition to their salary. The perquisites may be monetary, non-monetary, or a combination of both. Some examples of perquisites include rent-free accommodation, insurance premiums paid on behalf of the employees, and interest-free or concessional loans, among others.The value of these perquisites is considered to be salary under section 17(1) of the Income Tax Act. However, the taxability of perks differs depending on their nature. For instance, some perquisites are fully taxable, whereas others are fully tax-exempt. Meanwhile, there are also a few perquisites that are partially taxable.
- Profits in Lieu of Salary Profits in lieu of salary are monetary compensation other than salary, wages, and perquisites that an employee receives as part of their employment. These include the following payments:
- Fees, Commissions and Bonuses Section 17(1) of the Income Tax Act considers fees, commissions, and bonuses paid to employees as taxable salaries. Fees include amounts received by an employee for rendering special services in addition to those mentioned in their employment contract.Commissions are additional compensation paid to employees based on their performance. Commissions can either be a fixed portion or a percentage of the sales or profits of the employer.Bonuses include monetary or non-monetary compensation provided to employees as a reward for good performance.
- Advance Salary Salary that is not due yet but paid to employees is classified as advance salary and forms a part of the taxable salary component as per section 17(1) of the Income Tax Act.
- Leave Encashment Leave encashment is the monetary compensation provided to employees by converting unclaimed accumulated leaves. Such money earned as leave encashment is classified as salary under section 17(1) of the Income Tax Act and is taxable under the head ‘Income from Salaries’.
- Gratuity Gratuity is a lump-sum monetary compensation that an employer pays to their employees on retirement to appreciate the contribution they made to the organisation. Although gratuity is classified as a salary as per section 17(1) of the Income Tax Act, it is exempt from tax to a certain extent.
- Pension A pension is a sum of money that employees receive from their employer after retirement. It is typically paid each month to help the employee meet their financial needs. Section 17(1) of the Income Tax Act classifies pension received from the present employer as salary and pension received from a previous employer as profits in lieu of salary.
- Contribution to the National Pension System Contributions that employers make to their employees’ National Pension System (NPS) accounts are classified as salary under section 17(1) of the Income Tax Act.
- Contribution to the Employees Provident Fund Employer contributions in excess of 12% of the salary of the employees to the Employees Provident Fund (EPF) accounts are also classified as salary.
- PF Balance Transfers The taxable part of the balance in an unrecognised provident fund will be considered a salary as per section 17(1) of the Income Tax Act when it is transferred to a recognised provident fund.
Also Read: Provident Fund (PF): Types of PF
On What Basis is Salary Income Charged As Per the Income Tax Act?
Salary under the Income Tax Act is charged in accordance with the provisions contained in section 15 of the act. Section 15 states that salary would be subject to tax on accrual or receipt, whichever is earlier.This essentially means that salary, as per section 17(1) of the Income Tax Act, would be taxed if:
- It is paid first and accrues later, which happens in the case of advance salary payments.
- It accrues first and then is paid later, which happens in the case of salary arrears for the previous years.
- It accrues and is paid within the same financial year.
How Does the Place of Accrual Impact the Taxability of Salary Income?
According to the provisions of the Income Tax Act of 1961, salary income is only taxable in India if it accrues or is deemed to accrue in India. Therefore, the place of accrual has a major impact on the taxability of salary as per section 17(1) of the Income Tax Act.Salary will be deemed to accrue in India if the services are rendered within India's territorial boundaries. This rule applies irrespective of the employer's location, payment location, and taxpayer's residential status.For example, if a salary is paid in the U.S. to a non-resident Indian living in New York by a company located in the U.S. for services rendered in Delhi, it would still be deemed to accrue in India and taxed under the head ‘Income from Salary’.Additionally, leave encashment paid to employees residing outside India for leaves that were earned in India is also deemed to accrue or arise in India and would be taxed under ‘Income from Salary’. Note: There are two exceptions to this rule. Firstly, if the taxpayer is a resident of India, all salaries, irrespective of whether they accrued in India or in a foreign country, will be taxable in India under the heading ‘Income from Salary’. Secondly, if there is a Double Taxation Avoidance Agreement (DTAA) between India and a foreign country, the taxability of salary as per section 17(1) of the Income Tax Act may be affected. In such cases, the terms of the DTAA will gain precedence over the Income Tax Act.
Conclusion
With this, you must be aware of what the term salary as per section 17(1) of the Income Tax Act encompasses. Now, if you are someone who receives various monetary and non-monetary benefits from your employer, keep in mind that they could be classified as salary. If they are, you must make sure to include them under the heading ‘Income from Salary’ when filing your income tax returns .Ready to make the most of your money? Start your tax planning journey now!
FAQS - FREQUENTLY ASKED QUESTIONS
What is salary according to section 17(1) of the Income Tax Act ?
As per section 17(1) of the Income Tax Act, salary can be defined as compensation that an employee receives from their employer for services that they render. Salary includes both monetary and non-monetary compensation.
Is pension income considered a salary as per the Income Tax Act ?
Yes. According to section 17(1) of the Income Tax Act, pensions are considered a salary if they are from a former employer. However, if pensions are from an annuity plan, they are classified as income from other sources.
What are perquisites and wages as per the Income Tax Act ?
Perquisites, also known as perks, are benefits that are provided to employees in addition to their salary. Perquisites can either be in the form of cash, kind, or a combination of the two. Wages, on the other hand, are the money an employer pays to their employees under contract for services that the employees provide.
Are perquisites taxable as per section 17(1) of the Income Tax Act ?
Yes. Some perquisites and benefits in lieu of salary are taxable as per section 17(1) of the Income Tax Act. However, there are perquisites that are fully tax-exempt and partially tax-exempt as well.
Who should deduct tax on benefits in lieu of salary and perquisites as per section 17(1) of the Income Tax Act ?
Under income tax section 17(1), the employer is responsible for deducting tax on salary, perquisites, and benefits in lieu of salary. The deducted tax must then be deposited with the income tax authorities within the specified due dates.
Which income tax return form should individuals with salary income use ?
Individuals with only income from salary u/s 17(1) of the Income Tax Act must file ITR 1. Individuals with income from salary as per section 17(1) of the Income Tax Act, income from more than one house property, capital gains, and income from other sources must file ITR 2.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
