Section 17(1) of the Income Tax Act outlines the provisions related to the taxation of salary income in India. This section defines what constitutes salary for taxation purposes and lays down the framework for assessing and charging tax on this type of income. Let us explore the key aspects of Section 17(1) in detail:
What is Section 17(1)?
Section 17(1) of the Income Tax Act, 1961, defines the term "salary" and provides guidelines for determining the taxability of salary income earned by individuals in India. It forms the basis for assessing the tax liability on income received by employees from their employers.
What is a salary under Section 17(1)?
Under Section 17(1), the term "salary" includes any payment received by an employee from an employer in cash, kind, or as a facility. It encompasses various components such as basic salary, allowances, bonuses, commissions, perquisites, and profits in lieu of salary. The definition of salary is comprehensive and covers a wide range of remuneration received by employees in the course of their employment.
What is the basis of salary income being charged?
The basis of charging tax on salary income is the principle of accrual and receipt. Salary income is taxable in the hands of the employee in the year in which it accrues or is received, whichever is earlier. This means that salary income is subject to tax when it becomes due, regardless of whether it has been actually received by the employee.
Conditions under which the salary is taxable in India
Salary income is taxable in India if the following conditions are met:
- The income is received or deemed to be received by the employee.
- The income accrues or arises to the employee in India.
- The income is derived from employment services rendered in India.
List of incomes classified as salary
Incomes classified as salary under Section 17(1) of the Income Tax Act encompass a broad range of remuneration and benefits received by employees from their employers. Here is a comprehensive list of incomes considered as salary under Section 17(1):
1. Basic salary: The fixed component of an employee's salary is paid by the employer regularly.
2. Dearness Allowance (DA): Additional compensation is provided to employees to offset the impact of inflation on their purchasing power.
3. House Rent Allowance (HRA): Allowance provided by employers to employees to meet their rental expenses for accommodation.
4. Special allowance: Additional allowance is granted to employees for specific purposes, such as travel, education, or any other special needs.
5. Bonus: Additional payment is made to employees as a reward for their performance or to share the profits of the company.
6. Commission: Payments are made to employees based on the sales or revenue generated by their efforts.
7. Perquisites (perks): Non-monetary benefits or facilities provided to employees in addition to their salary, including:
- Rent-free or concessional accommodation is provided by the employer.
- Use of company vehicles for personal purposes.
- Payment of medical expenses or insurance premiums on behalf of employees.
- Provision of club memberships, mobile phones, laptops, etc.
8. Leave encashment: Payment received by employees in exchange for unused leave days accumulated over time.
9. Retrenchment compensation: Compensation received by employees upon termination of their employment due to retrenchment or layoff.
10. Gratuity: Lump-sum payment made by the employer to employees as a token of appreciation for their long and meritorious service.
11. Pension: Periodic payments are made to retired employees as a form of financial support during their retirement years.
12. Arrears of salary: Any unpaid salary from previous years that is received by employees in the current year.
13. Profit in lieu of salary: Any payment received by employees in lieu of salary, such as compensation for relinquishing rights or services.
14. Any other remuneration: Any other form of remuneration or benefit received by employees from their employers, not specifically mentioned above, but falling within the ambit of salary as defined under Section 17(1).
Place of accrual of salary
The place of accrual of salary is a crucial determinant for the taxability of salary income under Section 17(1) of the Income Tax Act. Here is how the place of accrual is determined:
- Services rendered in India: If the services for which the salary is paid are rendered in India, the salary is considered to accrue or arise in India. This applies irrespective of the residential status of the employee or the location of the employer. Therefore, any salary earned by an individual for services performed within the territorial boundaries of India is taxable in India.
- Residency status of the employee: For tax residents of India, all salary income, whether earned in India or abroad, is taxable in India. Non-residents, on the other hand, are subject to tax only on income that accrues or arises in India, regardless of their nationality or citizenship.
- Salary paid outside India for services rendered in India: If a non-resident individual receives salary payments outside India for services rendered in India, such income is taxable in India. However, if the salary pertains to services rendered outside India, it may not be taxable in India.
- Employment on a ship or aircraft: In the case of employment on a ship or aircraft, the place of accrual of salary is determined based on the location where the employee's duties are performed. If the services are rendered while the ship or aircraft is in India, the salary is deemed to accrue or arise in India and is taxable accordingly.
- Exceptions and treaties: Certain exceptions or provisions under double taxation avoidance agreements (DTAA) may affect the taxability of salary income for individuals working in India but receiving salary from foreign employers. In such cases, the provisions of the DTAA prevail over domestic tax laws.