Section 17 of the Income Tax Act, 1961- Salary, perquisite and profits in lieu of salary
Updated: Oct 17, 2022
Three clauses are covered in this section.
Clause 1: According to Section 17(1) of the Income Tax Act, salary in the preceding year includes wages, any salary advances, any fee, commission, perquisites, profits in place of or in addition to the pay/wage, etc. Furthermore, an employer-employee relationship is a necessary need before taxing a specific receipt under the heading "Salaries." It won't be considered a wage, for example, if you receive your pay as a partner in a partnership firm.
Following is a list of incomes that the Income Tax Act's Section 17(1) classifies as salary:
Annuity or pension
any fees, commissions, perks, or profits in addition to or in place of any salaries or wages
any salary advance
Encashment of unavailed leaves
Any contribution provided by the Central Government or any other employer under the National Pension Scheme
The annual increase in balance to an employee's credit if they choose a recognised provident fund to the point where it becomes tax-deductible
Clause2 : Perquisites are defined as "any benefit related to an office or post in addition to the pay or wages" in Section 17(2) of the Income Tax Act. Perquisites may be given in kind or in cash. You should be aware that only the following conditions apply for something to be taxable under the heading "Salaries":
Permitted to an employee by an employer
Permitted as long as the employment remains
depending solely on the service
resulting in the employee's personal gain
resulting from the employer's authority
It's not necessary for a perquisite to be a recurring or regular receipt. If a non-recurring receipt meets the aforementioned requirements, it may also be referred to as a perquisite.
Here are a few more ideas to take into account when deciding whether a certain salary is a perquisite:
Make sure the employer gives you the perquisite. This perquisite will be subject to taxation under the headings "Profits and gains of business" or "Income from other sources" if it is received from someone other than the employer.
If a benefit has a legal provenance, it will be regarded as a perquisite. It would be required by law to restore any unauthorised benefit that an employee received with the employer's consent. It won't qualify as a perquisite covered by Section 17(2) of the Income Tax Act.
According to Section 17, the following items are considered perquisites (2).
The worth of a rent-free house given to an employee by their employer
The value of any rent-related accommodations offered by the company to an employee as a concession
the worth of any amenity provided without charge or at a discounted rate in any of the following situations: (i) By a company to an employee who is a director; (ii) By a company to an employee, who has a substantial interest in the company and (iii)By an employer or a company to an employee to whom the two aforesaid provisions do not apply. Additionally, an employee whose income under the head ‘Salaries’ exceeds Rs. 50,000 excluding all the benefits and amenities
Any sum paid by the employer as a result of a duty that was originally the assessee's responsibility
Any sum paid by the employer to effectuate an assurance on the life of the employer or a contract for an annuity, whether directly or through a fund (but not through a recognised provident fund, an approved superannuation fund, or a deposit-linked insurance fund)
Any specified security's value that the employer has granted or transferred to an employee directly or indirectly, whether for free or at a reduced rate.
The sum that the employer contributes on behalf of the assessee that exceeds Rs. 1,50,000 to a superannuation fund that has been approved
The value of any other fringe benefit as may be prescribed under Section 17(2)(viii)
Clause3: Profits in lieu of Salary are what the Income Tax Act defines in Section 17(3). An employer may provide these benefits in place of or in addition to salary. As the name implies, the employee receives these payments in addition to or instead of compensation or earnings. The following are some of these payments:
(1) Terminal Compensation: Any money owed or received by an assessee from his current or previous employer at the time of his termination of employment or the modification of the terms and conditions governing it is regarded as profits in lieu of salary. Retirement, an early termination, resigning, or another reason could have caused the termination.
(2) Payment from an Unrecognized Provident Fund or an Unrecognized Superannuation Fund: This category of profit in lieu of salary includes payments that are owed to or received by an assessee from Unrecognized Provident Funds or Unrecognized Superannuation Funds, to the extent that they do not include employee contributions or interest on those contributions.
(3) Payment under a Keyman Insurance Policy: Any compensation owed to or received by an employee under a Keyman Insurance Policy, including any incentive payments made under the policy, shall also be considered profit in lieu of wages.
(4) Any amount owed or received before to beginning employment or following its termination:
Any amounts owed or received by any assessee, whether in full or in part, from anyone—
(A) prior to his beginning any employment with that individual; or
(B) after his employment with that person has ended.
(5) Any additional money an employee receives from their employer: All additional payments made by an employer to an employee fall under the category of "Profits in lieu of salary." Due to this comprehensive clause, any payments made by an employer to an employee—whether given willingly or as a result of a legal obligation—are considered profit in lieu of compensation.
However, because they are exempt under section 10, the following receipts will not be considered "profits in lieu of salary."
Section 10 provides for a death-cumulative-retirement gratuity (10)
Pension commutation — Section 10 (10A)
A worker's retrenchment compensation — Section 10 (10B)
Section 10: Payment from a statutory provident fund (11)
Section 10: Payment received from a recognised provident fund (12)
Section 10 payments from authorised superannuation funds (13)
Section 10 exempts house rent allowance (13A)
In short, with the exception of the terminal and other payments specifically exempted under clauses (10) to (13A) of section 10, all other payments received by an employee from an employer or former employer are taxable under this head.