Section 17 of the Income Tax Act, 1961, plays a crucial role in determining the taxability of salaries for individuals in India. This section covers various components of salary, perquisites, and profits in lieu of salary, outlining how they are taxed. Understanding Section 17 is essential for employees to maximise their tax benefits and comply with the tax regulations effectively.
What is Section 17?
Section 17 of the Income Tax Act defines the term "salary" and its components, including perquisites and profits in lieu of salary. It provides clarity on what constitutes salary income and how different components are treated for tax purposes.
What are perquisites in salary?
As per Section 17(2) of the Income Tax Act, perquisites are extra benefits or privileges that employees receive from their employer (in addition to their regular salary). These perks can be monetary or non-monetary and may be taxable or non-taxable.
Let’s look at some major types of perquisites:
If your employer provides you with accommodation without charging rent, the value of this benefit is considered a perquisite.
If accommodation is given at a concessional rate (less than the market value), the difference between the fair market rent and the actual amount paid by the employee is taxable
If an employer provides fringe or non-monetary benefits, such as free meals, company-provided cars, or club memberships, these are considered perquisites.
If your employer pays your personal expenses (such as utility bills or school fees), these payments are considered perquisites and are taxable as part of your salary.
If the employer provides equity shares at a lower price or for free, the difference between the fair market value and the price paid (or zero) is taxable as a perquisite
If the employer’s total annual contribution to Provident Fund, NPS, or Superannuation Fund exceeds Rs. 7.5 lakhs, the excess amount becomes taxable.
Any annual interest or dividend earned from the employer’s contribution to Provident Fund, NPS, or Superannuation Fund is taxable if the contribution exceeds Rs. 7.5 lakhs.
Section-17 as per act
Section 17 of the Income Tax Act defines perquisites as additional benefits or privileges that an employee receives from their employer (apart from their salary or wages).
This section specifies various forms of perquisites, which are explained below:
1. Rent-free accommodation
When an employer provides accommodation to an employee without charging any rent, it is considered a perquisite. The taxable value of this benefit is calculated as per the rules specified by the Income Tax Department.
Primarily, this value depends on these two factors:
Salary
and
Location of your accommodation
2. Accommodation provided at concessional rates
If the employer provides accommodation at a rate lower than the market value, the difference between the market rent and the amount charged is taxable.
3. Benefits or amenities provided free or at concessional rates
Employers may provide non-monetary benefits like:
Company cars
Free meals
Club memberships
Any other amenity
These are taxable if:
The employee is a director or holds a significant stake in the company.
The employee’s total salary (monetary payments) from one or more employers exceeds a specified limit.
4. Sweat equity shares or specified securities
If an employer grants sweat equity shares (issued to employees as a reward for their services) or specified securities at a concessional rate or free of cost, the difference between the market value and the price paid by the employee is treated as taxable income.
5. Employer pays the employee’s personal obligations
If the employer pays for personal expenses of the employee (say, utility bills or financial liabilities), the amount paid is considered a taxable perquisite.
6. Employer’s contribution for life insurance or annuity contracts
If the employer pays any amount towards the employee’s life insurance or an annuity contract, it is considered a perquisite.
However, payments made towards recognised provident funds, approved superannuation funds, or deposit-linked insurance funds are excluded from taxation.
7. Excess employer contribution to Provident Fund, NPS, or Superannuation Fund
If the employer’s contribution to the employee’s provident fund, NPS, or superannuation fund exceeds Rs. 7.5 lakhs in a financial year, the excess amount is taxable. This limit applies to the total of all these contributions combined.
8. Interest or dividend on excess employer contribution
If the employer’s contribution to these funds exceeds Rs. 7.5 lakhs, any interest, dividend, or similar earnings generated from the excess contribution are also taxable.
Components of salary under Section 17
- Basic salary: This is the fundamental component of an employee’s compensation and forms the basis for other salary components.
- Allowances: These are financial benefits given to employees for specific purposes. Common allowances include House Rent Allowance (HRA), Leave Travel Allowance (LTA), and Conveyance Allowance.
- Perquisites: These are benefits or amenities provided by the employer to the employee in addition to the basic salary. Examples include rent-free accommodation, company car, and club memberships.
- Profits in lieu of salary: This includes any compensation received by an employee from the employer in addition to the salary, such as gratuity, pension, and retrenchment compensation.
How many provisions are included under Section 17?
Section 17 of the Income Tax Act provides the definition of salary and the benefits or perquisites that employees may receive. It also covers payments made in addition to the basic salary, commonly known as "profits in lieu of salary."
This section is divided into three key provisions:
Section 17(1)
Section 17(2)
Section 17(3)
Each provision addresses a specific aspect of employee compensation. Let’s understand them in detail:
1. Section 17 (1)
Section 17(1) of the Income Tax Act defines "salary" from an employer's perspective. It includes a range of monetary payments that an employee may receive from their employer:
Either as direct compensation for their services
or
As additional allowances and benefits
Meaning of Salary as Per Section 17(1)
As per Section 17(1), salary includes the following components:
- Wage
- This is the primary payment made by an employer to an employee as per the terms of the employment contract.
- In pay slips, it is usually reflected as:
- Basic pay
- Remuneration
- Salary
- Wages also include:
- Any payment made towards paid leave
or - Money due from the employer for services rendered
- Any payment made towards paid leave
Advance salary
Sometimes, employers pay a portion of the salary in advance (before the actual services are rendered).
This advance salary is taxable in the year of receipt.
However, a loan taken from the employer does not count as advance salary.
Fees
Any monetary compensation paid by the employer in exchange for “specific services” rendered by the employee is classified as fees.
This may be a part of the overall salary package or separate remuneration (given for additional duties).
- Commission
- Employees (particularly those in sales roles), may receive a commission as a percentage of the:
- Sales made
or - Targets achieved
- Sales made
- This amount is added to the salary for tax calculation.
- Employees (particularly those in sales roles), may receive a commission as a percentage of the:
Annuity/ Pension
When an employer pays a sum of money to the employee upon retirement or after reaching a specific age, it is classified as an annuity.
This amount forms part of the taxable salary.
Gratuity
Gratuity is a lump-sum payment made voluntarily by the employer as a reward for long-term service.
It becomes payable after the employee completes a specified number of years of service.
Gratuity is partially taxable and depends on whether the employer is covered under the Gratuity Act.
Leave encashment
This refers to the payment received for unused leave.
An employee may receive this during employment or at the time of retirement.
Depending on the circumstances, it can be fully or partially taxable.
Employer's contribution to NPS
If the employer contributes to the employee's National Pension Scheme (NPS) account, it forms part of the salary.
This contribution is taxable if it exceeds the prescribed limit of Rs. 7.5 lakhs.
Additional Provident Fund contributions
Any additional employer contribution to the Provident Fund that exceeds the specified tax-free limit (Rs. 7.5 lakhs) also becomes part of the salary.
Allowed deductions from salary income (as per Section 16)
Professional Tax
The professional tax paid to the state government is deductible from salary income.
Entertainment Allowance
For government employees, a deduction of up to Rs. 5,000 or 20% of the salary, whichever is lower, is permitted.
Standard Deduction: A flat deduction of Rs. 50,000 (under old regime) and Rs. 75,000 (under new regime) is available to salaried individuals.
2. Section 17 (2)
Perquisites are non-cash benefits provided by employers to employees (either free or at concessional rates). These are categorised into monetary and non-monetary benefits and are taxable if they exceed the prescribed limits.
Monetary perquisites
Rent-free accommodation: If the employer provides a house without charging rent, it is taxable as a perquisite.
Concessional rent accommodation: When rent is charged at a lower rate than the market value, the difference is taxable.
Employer’s contribution to Provident Fund: If the employer’s contribution exceeds Rs. 7.5 lakhs per year, the excess amount is taxable.
Superannuation benefits: Contributions to superannuation funds by the employer are taxable (if they exceed Rs. 7.5 lakhs).
Insurance premiums: If the employer pays the employee's insurance premium, it becomes a taxable perquisite.
Sweat equity shares: Any shares issued to employees at concessional rates or free of cost are taxable.
Non-monetary perquisites
Free domestic help: If the employer provides domestic help services, the cost of such services is taxable.
Utility payments: Free provision of gas, electricity, water, or internet by the employer is taxable.
Educational facilities: If the employer covers educational expenses for an employee’s children exceeding Rs. 1,000 per month, it becomes taxable.
Food coupons: Any value received through food coupons is considered taxable income.
Free travel expenses: If the employer covers travel costs, it becomes a taxable benefit.
Tax-free perquisites
Telephone charges: If paid by the employer, these do not attract tax.
Medical Loans under Rs. 20,000: If the employer provides a concessional or interest-free loan for medical treatment, it is tax-exempt.
Government-provided residences: Residences provided to government officials and judges are exempt from tax.
3. Section 17 (3)
This section covers payments received as a substitute for salary (either upon termination or during employment). These payments are known as “profits in lieu of salary” and are treated as taxable income.
For more clarity, let’s study some of its primary examples:
Compensation for termination: If the employer compensates the employee for ending the employment contract, this amount is taxable.
Pre- and post-termination payments: This covers any money received before joining or after leaving employment, such as
Signing bonuses
Severance pay
Payments from keyman insurance policy: If an employer holds a Keyman Insurance Policy and the payout is made to the employee, it is taxable as profits in lieu of salary.
Unrecognised Provident Fund contributions: If an employer contributes to a fund that is not recognised by the tax authorities, such contributions are taxable.
Voluntary payments: Any amount paid by the employer voluntarily that does not fall under “basic salary” is treated as profits in lieu of salary.
Legal obligation payments: If the employer makes a payment that the employee would otherwise have to make, it is taxable.
Perquisites and their taxability
Perquisites are non-cash benefits provided by employers to employees. Some common perquisites and their tax treatment under Section 17(2) include:
- Rent-free accommodation: The value of rent-free accommodation provided by the employer is taxable as a perquisite.
- Company car: The perquisite value of a company-provided car depends on whether it is used solely for official purposes or both official and personal purposes.
- Medical facilities: Medical facilities provided by the employer are exempt up to Rs. 15,000 per annum.
Profits in lieu of salary
Profits in lieu of salary include any payments received by an employee from the employer in addition to the salary. This includes:
- Retrenchment compensation: Compensation received on termination of employment is taxable under the head 'Income from Salary'.
- Pension: Pension received by an employee is taxable as salary. However, commuted pension (lump sum payment) is partially exempt under Section 10(10A).
- Leave encashment: Leave encashment received at the time of retirement is partially exempt under Section 10(10AA).
Guidelines for tax planning under Section 17
- Maintain proper documentation: Keep records of all salary components, including allowances, perquisites, and other benefits, to ensure accurate tax calculation and compliance.
- Plan your allowances: Utilize tax-exempt allowances like HRA and LTA to reduce your taxable income. Ensure that you provide necessary proofs such as rent receipts and travel bills to claim these exemptions.
- Understand perquisites: Familiarize yourself with the taxability of various perquisites provided by your employer. Some perquisites may have partial exemptions or specific conditions for tax benefits.
- Utilise deductions: Take advantage of deductions available under different sections, such as Section 80C for provident fund contributions and Section 80D for health insurance premiums.
- Consult a tax advisor: If the taxability of salary components and perquisites seems complex, seek advice from a tax professional. They can help you optimize your tax liability and ensure compliance with tax laws.
Tax treatment of different components under Section 17
Section 17 of the Income Tax Act covers the tax treatment of salary components received by employees (including both monetary and non-monetary benefits).
We can categorise these salary components in three major parts that are explained below:
1. Monetary benefits
Monetary benefits include:
Basic salary
Allowances
Bonuses
Advance salary
These are taxed as part of the employee’s salary income. Basic salary is fully taxable, while allowances like HRA may be partially exempt if conditions are met.
On the other hand, bonuses, commissions, and advance salary are fully taxable in the year of receipt.
Also, you are allowed deductions under Section 16, such as professional tax and a standard deduction of Rs. 75,000 (under the new regime) or Rs. 50,000 (under the old regime).
2. Non-monetary benefits (Perquisites)
Perquisites include non-cash benefits like:
Rent-free accommodation
Company cars
Contributions to provident funds exceeding Rs. 7.5 lakhs annually
These benefits are valued based on rules set by the Income Tax Department. Taxable perquisites also include sweat equity shares allotted at concessional rates and employer-paid utility bills.
Some perquisites, like telephone expenses and concessional medical loans (up to Rs. 20,000), are exempt from tax.
3. Profits in lieu of salary
This category covers compensation received on:
Termination
Keyman Insurance Policy payouts
Payments made by the employer voluntarily
They also cover sums received from unrecognised provident or superannuation funds. All these amounts are taxable as “salary income” because they arise from the employment relationship.
Common misconceptions and compliance requirements
To remain tax compliant, you must correctly declare your taxable income and file your income tax returns (ITR). However, many individuals and business owners have several misconceptions about tax filing. Usually, this leads to non-compliance and penalties.
In this section, let’s check out some common misconceptions and learn the various compliance requirements:
Common misconceptions
Employees don’t need to file an ITR if TDS is deducted
Some employees believe that if their employer deducts Tax Deducted at Source (TDS), they don’t need to file an ITR.
However, please note that filing an ITR is mandatory if your income exceeds the basic exemption limit (regardless of TDS).
Small profit means no ITR for business owners
Many small business owners think they don’t need to file an ITR if they make a low profit. In reality, the requirement is based on the turnover or gross receipts, not profit.
If the turnover crosses the specified threshold, filing an ITR is mandatory, even if the profit is minimal.
Compliance requirements
To comply with tax laws and avoid income tax notices, you must:
Maintain accurate records
Meet deadlines
Report all the sources of income
By filing an ITR on time, you can prevent penalties and pay the right income tax amount. Also, it helps in accurate income calculation and audit verification.
As per the Income Tax Act, non-compliance can lead to the following penalties:
Compliance requirement |
Penalty for non-compliance |
Filing ITR on time |
Up to Rs. 5,000 |
Maintaining proper records |
Up to 300% of the tax payable |
Disclosing all income |
Additional tax liability and penalties |
Integrating home loans into tax planning
Home loans offer significant tax benefits that can be integrated into your tax planning strategy. The principal repayment of a home loan qualifies for deductions under Section 80C, up to a limit of Rs. 1.5 lakh. Additionally, the interest paid on a home loan is deductible under Section 24(b), with a maximum limit of Rs. 2 lakh per annum for a self-occupied property.
By leveraging these deductions, you can reduce your taxable income significantly, making a home loan a wise choice for both investment and tax planning. Moreover, choosing a reliable home loan provider can simplify the process and enhance your overall experience.
Important Links: What is Home Loan | Home Loan Eligibility Criteria | Documents Required for Home Loan | Home Loan Balance Transfer | Joint Home Loan | Home Loan Tax Benefits | Home Loan Subsidy
Key takeaways
Section 17 of the Income Tax Act defines what constitutes "salary" for tax purposes in India. It covers various salary components and explains how they are taxed.
Salary income includes different components like basic salary, allowances, perquisites (non-cash benefits), and profits in lieu of salary. Each of these components is taxed differently based on specific rules.
By knowing the deductions offered under Section 17 (like professional tax and standard deduction), you can smartly manage your tax obligations.
Through proper tax planning (based on the Income Tax Act), you can reduce your income tax liability. It also ensures compliance with tax laws and minimises the risk of penalties.
Section 17 is important for individuals in India to understand their salary structure and its tax implications. It lets you accurately calculate your taxable income.
Conclusion
By understanding the various provisions of Section 17 of the Income Tax Act, you can do better tax planning. This section tells you how various salary components are taxed.
When you are aware of various deductions, you can significantly reduce your income tax liability. Also, such an approach allows you to take advantage of available tax benefits and make the most of your income.
To optimise tax planning, you must:
Claim deductions for perquisites
Use exemptions for allowances
Choose the most suitable tax regime
Also, stay updated with changes in tax laws! This ensures your tax planning strategies are accurate and compliant.
