Income tax is calculated for salaried individuals based on different tax slabs. Salary refers to the remuneration an employee receives from a company for the work done during a specified period. It is essential to understand what constitutes a salary for an employee, which will enable him to better understand his tax liabilities. In this article, we will explain Section 17 (1) of Income Tax Act and different incomes that come under the ‘salary’.
See also: Provisions under Section 44AE of Income Tax Act that you must know
Salary definition as per Income Tax Act
Salary is defined under the sub-section (1) of Section 17 of Income Tax Act, 1961. As per Section 17 (1), money or payment that an employee receives from his company during a financial year, in the following forms, constitute salary for the calculation of income tax:
Wages
It refers to the amount received by an individual for work performed or services rendered. The money may be received under the name — pay, basic pay, basic salary, salary, remuneration, etc. The payment can be made for the actual work, paid leaves, or the actual amount received or due in the relevant previous year.
Annuity or pension
The income received as annuity or pension is the amount paid by the past or current employer after the individual reaches the age of retirement or superannuation. It is fully taxable whether paid direct as pension or out of a superannuation fund set up by the employer.
Gratuity
Gratuity refers to the amount paid as lump sum by the employer to an employee as a token of gratitude for services delivered in the past. This amount is exempted up to a specified limit under Section 10 (10).
Commission, fees, perquisites, profits in lieu of salary
- Fee: Any amount received under the name ‘fee’.
- Commission: Any commission given to the employee, paid as a fixed percentage of turnover achieved. It is fully taxable.
- Bonus: Bonuses received by employees are fully taxable on receipt basis. They can be of two types — statutory bonus received under a legal, or contractual obligation and gratuitous bonus, which is a casual benefit.
- Perquisites: Perquisites refer to added benefits the employee may receive in cash or kind, over and above the salary. Some examples include educational expenses, rent-free accommodation, or a concession in accommodation rent, interest-free loans, and insurance premium paid for employees.
- Profit in lieu of/in addition to salary: It includes any cash payments made by the employer to an employee.
Advance of salary
Advance salary payments are made to an employee in a financial year before the year they are due. However, it does not include loans availed from the employer.
Leave encashment
The payments made to an employee during the service or after retirement/resignation for the accumulated leaves that were not availed during the service period are classified in this category.
Employee Provident Fund (EPF)
The EPF contributions made by an employer also come under ‘salary’. It refers to the contributions exceeding 12 percent of the employee’s salary or the annual interest above the rate specified by the central government on balance to the credit of the employee’s provident fund. The EPF interest rates set by the government is 8.1% p.a. for FY 2021-22.
Transfer PF balance
The taxable portion of the transferred balance from an unrecognised provident fund to a recognised provident fund come under the category of salary.
National Pension Scheme (NPS)
The contribution amount by the central government or any other employer in the previous financial year, towards the employee’s account under a pension scheme, referred to in Section 8OCCD, will be considered a part of salary.
Basis of charge of salary income
Section 15 of the Income Tax Act explains the basis of charge of salary income. As per Section 15, salary is chargeable to tax either on ‘receipt basis’, or ‘due basis’, whichever is earlier. Income from salary received during a financial year comprises the following:
- Sum of money paid in advance to the employee before it became due or payable.
- Salary, whether paid or not, which is due to the employee during the year.
- Arrears paid during a year and not charged to tax in any earlier years.
FAQs
What does place of accrual of salary mean?
Salary accrued in India is taxable under the head ‘salary’ if (i) services were rendered in India even if the payment was made outside India; (ii) salary payment made by the government of a foreign country to their employees serving in India; (iii) leave salary payment made to the employees outside India regarding leaves obtained in India.
What is the difference between an employment and an agency?
In case of employment, the income earned under the employee-employer relationship is recognised as salary. However, the relationship under agency is that of an agent and a principal, and the income earned by the individual, i.e., the agent refers to business profits. Unlike an agent who functions independently and has his own facilities, an employee functions under the employer’s supervision and control.
What is forgoing vs surrendering salary?
There may be a case when an employee decides to forgo their salary, i.e. the employer does not have to give any salary to him/her. In such cases, the salary would be considered to be accrued by the employee. Thus, the salary will be taxed even when the employee does not receive any income from salary. However, if the employee wants to surrender their salary to the government, the salary that is rendered would be exempt from tax deduction.
What are the conditions under which salary is taxable?
An individual’s salary would be taxable if the services were rendered in India, irrespective of whether the payment was made outside the country. The salary is taxable if it is paid by the government of the foreign country to their employees working in India. Similarly, leave salary is paid to employees working outside India and earned the leaves in India.
How is pension taxed?
The pension amount that an individual receives from his former organisation is taxable under the head ‘salaries’, whereas the pension amount (family pension) received by his family members upon his death is taxed under the head ‘income from other sources’.
What is Section 17 2 medical reimbursement?
According to Section 17(2) of the Income Tax Act, 1961, medical reimbursement is tax-exempted. Medical reimbursement refers to refund of medical expenses incurred by an employee.
What are perquisites under Section 17(2)?
Prerequisites can be classified into – prerequisites that are taxable in all cases, prerequisites that are not taxable and prerequisites that are not taxable for specified employees.
Under which head does accrued salary fall?
Accrued salary is the salary that has been due but not received by an employee. It will come under the head ‘salary’ under Section 17 (1) of the Income Tax Act.
Are there any exemptions under Section 17 of the Income Tax Act?
Income such as reimbursement of medical expenses by employer, allowance for official travel, etc., do not come under the taxable income head under Section 17 of the Income Tax Act.
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Harini is a content management professional with over 12 years of experience. She has contributed articles for various domains, including real estate, finance, health and travel insurance and e-governance. She has in-depth experience in writing well-researched articles on property trends, infrastructure, taxation, real estate projects and related topics. A Bachelor of Science with Honours in Physics, Harini prefers reading motivational books and keeping abreast of the latest developments in the real estate sector.
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