Section 17(1) of the Income Tax Act: A Detailed Guide on Salaries
A salary is a type of fixed remuneration that an employee receives for working for a certain amount of time. However, the term "salary" as used in income tax also refers to several additional payments made to employees by their employers. The Income Tax Act's Section 17 contains specifics about the advantages that employers offer to their staff. Salary is the primary income head that is taken into account when submitting an income tax return. The explanation of salary is covered in Subsection (1) of Section 17. Let's talk about this in more detail.
Table of Contents:
Definition of Salary under Section 17(1) of the Income Tax Act
The term "salary" under Section 17(1) refers to any payment made by an employer to an employee in cash, kind, or as a facility. It includes several elements, including base pay, commissions, bonuses, allowances, perquisites, and gains instead of pay. The definition of pay is broad and includes all forms of compensation that workers may get while they are employed.
Components of Income from Salaries in Income Tax
The Income Tax Act's Subsection 17(1) offers a comprehensive description of "Salary." The phrase has far more meaning than is commonly understood. For income tax purposes, the amount an employee receives from his employer in any of the following terms during a financial year is deemed to be his "salary":
Wages
Wages are the amounts of money that an employer is required by contract to pay employees for services provided. It is typically paid to the employee under a variety of titles, including basic pay, salary, remuneration, etc. The payment can be made for real work, paid time off, or the actual amount owed or received during the pertinent prior year.
Pension or Annuity
An annuity is the money that one receives from their employment, either current or past, once one reaches retirement age. It might be a payment made from the employer-sponsored pension schemes.
Annuities from current employers are subject to "Salary" taxation.
A former employer's annuity is taxed as "Profits in lieu of Salary."
Profits in Lieu of Salaries or Wages
Compensation for changing job terms or for terminating an employment
Any amount owed to or received from an unrecognised provident fund or unrecognised superannuation fund, up to the employer's contribution amount plus interest
The money allotted as a bonus on the keyman insurance policy, as well as payments from the policy
Any sum obtained from anyone before beginning work or following its termination
Gratuity
A lump-sum payment made willingly to an employee by their employer as a thank you for their efforts to the company is known as a gratuity. The Payment of Gratuity Act, 1972 established the notion of gratuities into statute.
Commission
The employee's compensation will include any commissions paid for the services rendered. A fixed commission that is paid to the employee as a percentage of sales or profits is regarded as a salary.
Fees
The concept of salary includes the amount that an employee receives from their employer as payment for services provided.
Perquisites
Perquisites are extra advantages that an employee is entitled to as a result of their official position, on top of their income. It could be given in kind or cash. As an illustration, consider club dues, interest-free loans, educational costs, rent-free or significantly reduced housing, and employee insurance rates.
Advance Salary
Advance salary payments are those made during a financial year received before the year in which they are owed. An advance salary is not what an employer takes out in loan form.
Employee Provident Fund
Any contributions made to the employee's recognised provident fund by their employer that surpass 12 percent of their pay or the annual interest that exceeds the rate announced by the Central Government (the interest rate for the EPF is 8.25 percent for the financial year 2023–2024).
Leave Encashment
Certain private companies as well as the government pay its staff members for the paid time off. They may make the payment while still employed or following their resignation or retirement. Part of the remuneration will be the amount paid for any encashment of leaves that were not used during the employment term.
Transfer Provident Fund Balance
Salary will be the taxable part of the transferred balance from an unrecognised to a recognised Provident Fund.
National Pension Scheme (NPS)
A portion of an employee's pay will be deducted for contributions made to their NPS account throughout a fiscal year by the Central Government or any other employer.
Basis of the Charge of Salary Income
The basis of the charge of the salary income is covered in Section 15 of the Income Tax Act. Taxes will be deducted from salary either on a "due basis" or "receipt basis," depending on which occurs first. To be clearer, the following will constitute the year's income from salary:
Any sum given to the employee before it was due or payable in advance
Any salary owed to the employee for the year, whether or not it is paid
Salary arrears that were not subject to tax in previous years but were paid to the employee during the year
Location of Salary Accrual from a Taxability Perspective
According to section 17(1) of the Income Tax Act, one of the key factors affecting whether salary income is taxable is the location of accrual. This is how accrual location is ascertained. A salary is said to accrue or arise in India if any of the following conditions are met:
The services for which the salary is paid are rendered in India; in this case, the salary is taxable under the "Salaries" section. This is applicable regardless of the employee's residential status or the employer's location. As a result, any compensation received by an individual for work done inside India's borders is subject to taxation there (Section 9(ii)).
All salary income, whether earned domestically or overseas, is taxable in India for tax residents of India. On the other hand, regardless of their citizenship or nationality, non-residents are only required to pay taxes on income that originates or accrues in India (Section 6).
Income paid outside of India for services rendered in India by a non-resident person is taxable in India. Nonetheless, the salary could not be taxable in India if it relates to services provided outside of the country.
People who work in India but receive pay from overseas employers may find that their salary income is subject to taxation depending on certain provisions or exceptions under double taxation avoidance agreements. The DTAA's provisions take precedence over domestic tax law in these situations.
Conclusion
The Income Tax Act, 1961's Section 17(1) defines salary income in detail and specifies how different parts of pay income are treated tax-wise. To guarantee adherence to the Income Tax Act, it is crucial for employers and employees to comprehend the terms of this section.
FAQ
Q1. What is Section 17(1) of the Income Tax Act of 1961?
The Income Tax Act, 1961's Section 17(1) defines "Salary" and lists the several components that go into an employee's total compensation income.
Q2. What are the key components of salary income?
Basic pay, dearness allowance, house rent allowance, leave travel allowance, medical allowance, bonus, perquisites, profit in lieu of salary, gratuity, provident fund, superannuation fund, leave encashment, and allowances not exempt are all considered components of salary income under Section 17(1).
Q3. Are all components of salary income taxable?
No, there are other aspects of salary income, such as gratuities, LTAs, and HRAs, that are tax-free up to a certain amount and under specific circumstances.
Q4. How is the HRA exemption calculated?
The lowest of the following three sums is used to determine the HRA exemption: The following options are available:
Actual HRA received
Rent paid less 10% of basic pay
50% of basic pay if the worker resides in a metro area, or 40% of basic pay if not
Q5. Is gratuity taxable?
Depending on the employee's income and years of service, the amount of the gratuity is tax-free up to a particular threshold.
Q6. Is leave travel allowance (LTA) taxable?
LTA is tax-free twice within a four-year period, under specific restrictions.
Q7. Are all perquisites or benefits in lieu of salary subject to section 17(1) taxation?
No, section 10 of the Income Tax Act of 1961 may exclude from tax those perks or perquisites used in lieu of salary. For instance, up to a specific amount, housing rent allowance and leave travel allowance are exempt.
Q8. How is tax on salary income calculated?
Tax on salary income is calculated according to the tax slab rate applied to the employee’s total income. This includes salary income, after subtracting any exemptions and deductions.
Q9. Who deducts and deposits tax on salary income?
Employers deduct and deposit tax on salary income paid to their employees.
Q10. What happens in case of non-compliance with Section 17(1) provisions?
According to the Income Tax Act, fines and interest are imposed for failing to comply with Section 17(1) requirements. To prevent any legal problems, employers and employees must follow this section's requirements.
Q11. How can I enter my salary under section 17(1) of the ITR 2?
The monetary remuneration that an employer pays its employees is defined in Section 17(1). Form 16 will contain information about this salary, which must be reported in ITR 2 under Schedule S - Salary.
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