Section 17 of Income Tax- Salary, Perquisites and Profits In Lieu of Salary
Section 17 of the Income Tax Act contains a detailed categorization of the three different parts of employee benefits an employer provides. Salary, perquisites and profits in lieu of salary are the three different sections you will get to know in this section.
Provisions under Section 17 of Income Tax
There are three different provisions under Section 17 of Income Tax that discuss three different parts of employee benefits.
Section 17(1)
While filing for income tax returns, salary is the most prominent income head among the other heads of income. Therefore, section 17(1) discusses the salary in detail.
Meaning of “Salary” Under Section 17(1)
Section 17(1) of the ‘Salary’ includes wages, advance of salary, commission, fees, and any profit instead of salary or wage as provided by an employer to an employee. This is only applicable to an employee-employer relationship. For example, if you receive your salary as a partner in a partnership company, it won’t be treated as a salary under this subsection.
Also read: How To Save Income Tax On Salary?
Incomes Classified as “Salary” Under Section 17(1)
The following list includes the incomes which are classified as salaries under Section 17(1):
- Wages
- Annuity or pension
- Advance of salary
- Gratuity
- Fees, commissions, perquisites or any profits in lieu of salary
- Leave encashment
- Contributions made by Central Government or an employer under National Pension Scheme
- Annual addition to the credit balance of an employee opting for another provident fund to a limit where it is chargeable to income tax
Section 17(2)
The salary provided by an employer is the accumulation of basic allowances for an employee. Besides the basic allowances, an employee receives perquisites and profits besides just the salary. The second sub-section talks about the perquisites.
Perquisites under Section 17(2)
Perquisites are benefits provided to an employee in kind. They are only taxable under the head of ‘salary’ if they are:
- Allowed by the employer to the employee and not as a partner in a partnership firm
- Allowed during the continuation of the employment
- Resulting in personal benefits for the employee
- Dependant directly on the service
Inclusions in Section 17(2)
Perquisites as mentioned in Section 17(2) are listed below:
- Rent free accommodation
- Concession on rent of accommodation
- Amount of the facilities provided by the employee or concession on the amount in the following cases:
- To an employee who is a Director
- To an employee who has a substantial interest in the company
- To an employee whose salary exceeds Rs. 50,000 excluding all the facilities and benefits and also who doesn’t come under any of the aforementioned conditions
- Amount bearable by the employer for any responsibility which is supposed to be paid by the employee
- Amount bearable by the employer through a fund or directly, except funds like provident fund, superannuation fund or deposit-linked insurance fund for the purpose of an annuity contract or life assurance of the employer
- Value of security paid by the employer for an employee wholly or at a concessional rate
- Contribution towards the superannuation fund for an employee which is above Rs. 1,50,000
- Fringe benefits mentioned under section 17(2)(vii)
Also read: How To Calculate Taxable Income?
Section 17(3)
This sub-section of Section 17 mentions ‘Profits in lieu of Salary’ under the income head ‘salary’. Profits in lieu of salary refer to the additional benefits provided by an employer to an employee. These benefits are made mostly in the form of cash. You might get confused between a whole lot of profits or perks provided by the employer and which come under this section and which don’t. The following discussion will help you understand which incomes come under this provision.
Incomes under Section 17(3)
- Terminal compensation
- Amount received under an unrecognised provident fund or superannuation fund
- Payment under Keyman Insurance Policy
- Payment received before joining or after the termination of employment
- Any other amount received by an employee from the employer voluntarily or in accordance with a legal obligation
Final Word
All these perks as mentioned in Section 17 of the Income Tax Act fall under the income head, ‘Salary’ and are taxable by the Government.
FAQs on Section 17 of the Income Tax Act
The following incomes are not covered under ‘Profits in lieu of Salary’:
Commuted amount in pension
Death-cum-retirement gratuity
Amount received from a statutory or recognized provident fund
Retrenchment compensation received by a workman
Amount under a recognized superannuation fund
House rent allowance
If the Commissioner of Income Tax approves a provident fund under EPF and Miscellaneous Provisions Act, 1952, it becomes a recognized provident fund. He/she disapproves of an unrecognized provident fund.
Terminal compensation is the amount an employee receives in compliance with the termination of employment or modification in terms and conditions of employment.
Incomes such as medical bill reimbursement, travel allowance and children’s education do not fall under the incomes mentioned in the provisions of Section 17.
If the amount of a provident fund is received under the Provident Fund, 1925, then the entire amount is tax-exempted. In addition, any lump sum amount received from a PPF started in 1968 at the time of retirement is also tax-free.
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