Section 17(1) of the Income Tax Act, 1961 defines the term ‘Salary’ and lays down the various components that form part of the salary income of an employee. Salary income is one of the most common sources of income for an individual and is subject to taxation under the Income Tax Act.
Let’s take a closer look at the provisions of Section 17(1) of the Income Tax Act, 1961.
- Basic Salary: Basic salary is the fixed component of an employee’s salary and forms the basis for the calculation of various other allowances and deductions. It includes all payments made to an employee in the form of basic pay, dearness allowance (DA), and any other fixed allowances.
- Dearness Allowance (DA): Dearness Allowance (DA) is an allowance paid to employees to offset the impact of inflation on their salaries. It is calculated as a percentage of the basic salary and is taxable as salary income.
- House Rent Allowance (HRA): House Rent Allowance (HRA) is an allowance paid by an employer to an employee to meet the cost of living in a rented accommodation. The amount of HRA that is exempt from tax is calculated as the minimum of the following three amounts:
a. Actual HRA received b. Rent paid minus 10% of basic salary c. 50% of basic salary if the employee lives in a metro city or 40% of basic salary for non-metro cities.
Leave Travel Allowance (LTA): Leave Travel Allowance (LTA) is an allowance paid to employees to cover their travel expenses when they take a leave from work to travel. It is exempt from tax twice in a block of four years, subject to certain conditions.
Medical Allowance: Medical Allowance is an allowance paid to employees to meet their medical expenses. It is taxable as salary income.
Bonus: Bonus is an additional payment made to employees as an incentive for their performance. It is taxable as salary income.
Perquisites: Perquisites are benefits or facilities provided by an employer to an employee in addition to their salary. Some common examples of perquisites include rent-free accommodation, free or subsidized meals, company car, club memberships, etc. Perquisites are taxable as salary income.
Profit in lieu of salary: Profit in lieu of salary refers to any payment made to an employee by an employer in lieu of or in addition to salary. For example, if an employee receives shares or stock options from the employer, it would be treated as profit in lieu of salary. Such payments are taxable as salary income.
Gratuity: Gratuity is a payment made by an employer to an employee as a token of appreciation for their long and meritorious service. It is exempt from tax up to a certain limit based on the employee’s years of service and salary.
Provident Fund (PF): Provident Fund (PF) is a retirement savings scheme where both the employee and employer contribute a certain percentage of the employee’s salary every month. The amount contributed by the employer is taxable as salary income.
Superannuation Fund: Superannuation Fund is a retirement savings scheme where the employer contributes a certain percentage of the employee’s salary every month. The amount contributed by the employer is taxable as salary income.
Leave encashment: Leave encashment refers to the payment made by an employer to an employee for their unutilized leaves. It is taxable as salary income.
Allowances not exempt: Any allowance that is not specifically exempted under the Income Tax Act is taxable as salary income.
It is important to note that while the above components form part of the salary income of an employee, not all of them are taxable. Certain components, such as HRA, LTA, and gratuity, are exempt from tax up to certain limits and subject to certain conditions. Employers are required to calculate and deduct taxes on the taxable components of salary income and deposit the same with the government.
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In conclusion
Section 17(1) of the Income Tax Act, 1961 provides a comprehensive definition of salary income and lays down the tax treatment of various components of salary income. It is important for both employees and employers to understand the provisions of this section to ensure compliance with the Income Tax Act.
Frequently Asked Questions (FAQs)
Q. What is Section 17(1) of the Income Tax Act, 1961?
Section 17(1) of the Income Tax Act, 1961 defines the term ‘Salary’ and specifies the various components that form part of the salary income of an employee.
Q. What are the components of salary income?
The components of salary income as per Section 17(1) include basic salary, 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.
Q. Are all components of salary income taxable?
No, certain components of salary income, such as HRA, LTA, and gratuity, are exempt from tax up to certain limits and subject to certain conditions.
Q. How is the HRA exemption calculated?
The HRA exemption is calculated as the minimum of the following three amounts:
a. Actual HRA received
b. Rent paid, minus 10% of basic salary
c. 50% of the basic salary if the employee lives in a metro city or 40% of the basic salary for non-metro cities.
Q. Is leave travel allowance (LTA) taxable?
LTA is exempt from tax twice in a block of four years, subject to certain conditions.
Q. Is gratuity taxable?
Gratuity is exempt from tax up to a certain limit based on the employee’s years of service and salary.
Q. How is tax on salary income calculated?
Tax on salary income is calculated based on the applicable tax slab rate for the employee’s total income, including salary income, after deducting any exemptions and deductions.
Q. Who is responsible for deducting and depositing tax on salary income?
Employers are responsible for deducting and depositing tax on salary income paid to their employees.
Q. What are the consequences of non-compliance with Section 17(1) provisions?
Non-compliance with Section 17(1) provisions can attract penalties and interest as per the Income Tax Act. It is important for both employees and employers to ensure compliance with the provisions of this section to avoid any legal issues.
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