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.
There are three different provisions under Section 17 of Income Tax that discuss three different parts of employee benefits.
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):
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:
Inclusions in Section 17(2)
Perquisites as mentioned in Section 17(2) are listed below:
Also read: How To Calculate Taxable Income?
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)
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.
The following incomes are not covered under ‘Profits in lieu of Salary’:
Commuted amount in pension
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.
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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