Section 17(1) of the Income Tax Act, 1961, deals with the scope of ‘salary’ for the purposes of income tax. It is a crucial section that determines what constitutes ‘salary’ for tax purposes and has a significant impact on the calculation of income tax. In this blog, we will discuss section 17(1) of the Income Tax Act, 1961.
1. Introduction to Section 17(1):
Section 17(1) of the Income Tax Act, 1961, defines ‘salary’ for the purposes of income tax. The section lays down the scope of ‘salary’ that is taxable under the Income Tax Act. According to this section, salary includes wages, any annuity or pension, any gratuity, any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages.
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Meaning of Salary:
The term ‘salary’ refers to the remuneration or compensation paid by an employer to an employee for the services rendered by the employee. The term salary is not limited to the basic salary paid to the employee, but it also includes other monetary benefits received by the employee from the employer.
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Components of Salary:
Section 17(1) defines various components of salary which are as follows:
- Wages: Any amount paid to an employee in cash or kind by the employer for the services rendered by the employee is considered wages. It includes basic salary, dearness allowance, and any other allowances.
- Annuity or Pension: Any amount received by an employee as an annuity or pension from a previous employer is also considered as part of the employee’s salary.
- Gratuity: Gratuity is a payment made by the employer to the employee as a token of appreciation for their services. It is usually paid at the time of retirement or termination of employment. Gratuity received by the employee is also considered as part of the employee’s salary.
- Fees, Commission, and Perquisites: Any amount received by an employee in the form of fees, commission, or perquisites is also considered part of the employee’s salary. Fees and commission are paid to employees for specific services rendered, while perquisites refer to any non-monetary benefits provided by the employer to the employee.
- Profits in lieu of or in addition to Salary: Any amount received by an employee from the employer in the form of profits or gains is also considered part of the employee’s salary.
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Exclusions from Salary:
Section 17(1) also specifies certain exclusions from the definition of salary. These include:
- Employer’s Contribution to Provident Fund, Superannuation Fund, or National Pension Scheme: Any contribution made by the employer to the employee’s provident fund, superannuation fund, or national pension scheme is not considered part of the employee’s salary.
- Leave Travel Concession: Any amount received by an employee as leave travel concession is exempt from tax up to a certain limit.
- Medical Reimbursement: Any amount received by an employee as medical reimbursement for expenses incurred for their own or their family’s medical treatment is exempt from tax up to a certain limit.
- Transport Allowance: Any amount received by an employee as transport allowance is exempt from tax up to a certain limit.
Apart from the exclusions mentioned above, there are a few other items that are not considered as part of the employee’s salary. These include:
- Reimbursement of Business Expenses: Any expenses incurred by an employee for official purposes, which are reimbursed by the employer, are not considered part of the employee’s salary.
- Employer’s Contribution to Group Life Insurance: Any contribution made by the employer to the employee’s group life insurance policy is not considered part of the employee’s salary.
- Retrenchment Compensation: Any compensation received by an employee at the time of retrenchment is not considered part of the employee’s salary.
- Voluntary Retirement Scheme (VRS) Compensation: Any compensation received by an employee at the time of voluntary retirement under a VRS is not considered part of the employee’s salary.
It is essential to note that any income received by the employee, which is not specifically excluded from the definition of salary under Section 17(1), will be considered part of the employee’s salary and will be taxable under the Income Tax Act.
Conclusion
In conclusion, understanding Section 17(1) of the Income Tax Act, 1961, is crucial for both employees and employers. It helps employees to determine their taxable income and enables employers to calculate the correct amount of tax to be deducted from the employee’s salary. Therefore, it is important to consult a tax expert for any clarification regarding the scope of salary or tax implications related to it.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
- What is Section 17(1) of the Income Tax Act, 1961?
- Section 17(1) of the Income Tax Act, 1961, defines the scope of ‘salary’ for income tax purposes.
- What is included in the definition of salary under Section 17(1)?
- The definition of salary under Section 17(1) includes wages, annuity or pension, gratuity, fees, commission, perquisites, and profits in lieu of or in addition to salary.
- Are all components of salary taxable under the Income Tax Act?
- Yes, all components of salary, as defined under Section 17(1), are taxable under the Income Tax Act.
- What are the exclusions from the definition of salary under Section 17(1)?
- The exclusions from the definition of salary under Section 17(1) include employer’s contribution to provident fund, superannuation fund, or national pension scheme, leave travel concession, medical reimbursement, and transport allowance.
- Are reimbursements for business expenses considered part of salary?
- No, reimbursements for business expenses are not considered part of salary, as long as they are incurred for official purposes.
- Is retrenchment compensation taxable under the Income Tax Act?
- No, retrenchment compensation is not taxable under the Income Tax Act.
- Is voluntary retirement scheme (VRS) compensation taxable under the Income Tax Act?
- VRS compensation is not taxable under the Income Tax Act up to a certain limit, subject to certain conditions.
- Can an employee claim a deduction for medical expenses even if it is not reimbursed by the employer?
- Yes, an employee can claim a deduction for medical expenses under certain conditions, even if it is not reimbursed by the employer.
- What is the tax treatment of perquisites provided by the employer?
- Perquisites provided by the employer are taxable as part of the employee’s salary, unless specifically exempted under the Income Tax Act.
- What are the consequences of non-compliance with Section 17(1)?
- Non-compliance with Section 17(1) can result in penalties, fines, and legal action by the tax authorities. Therefore, it is important to comply with the provisions of Section 17(1) to avoid any legal consequences.
