Salary is a frequently used ‘Heads of Income’ while filing returns for income tax. According to the Income Tax Act, 1961, heads of income is the classification of income earned by an individual. This includes income from capital gains, income from house property, and income from other sources. 

 

The term ‘income from salary’ has been clearly defined under Section 17(1) to include perquisites, salary, and profits instead of a salary. These three characteristics also need to be considered while calculating income under the ‘Salaries’ head.

Definition of Salary as per Section 17(1)

The word ‘salary’ has been established under Section 17( 1) of the Income Tax Act to include perquisites, salary, and profits instead of a salary. Therefore, to calculate the income that comes under the head salaries, perquisites, the total amount of salary, and profits in the place of a salary received in a financial year must be calculated.

List of Incomes Classified as Salary

The below list of incomes is categorised as salary in Section 17(1) - 

  • Wages  

  • Gratuity 

  • Annuity or pension 

  • Commission, fees, profits, or perquisites in lieu of a salary 

  • The taxable part of the transferred balance from an unrecognised PF to a recognised PF 

  • Compensation for variation in service contract 

  • Salary advance  

  • Contribution made by the Central Government

What is the Basis of the Charge of Salary Income?

Section 15 deals with the basis of the charge of salary income. Salary is subject to tax either on a ‘receipt basis’ or ‘due basis’, whichever comes first. 

 

For more clarification, income from salary during a particular financial year consists of the following:

  • Any amount that is paid to the employee in advance before it becomes payable or due

  • Any salary due to the employee during that particular year whether paid or not

  • Arrears paid to the employee during a particular year and not charged to tax in previous years

Place of Accrual Of Salary

The salary under Section 17(1) that is accrued in India is taxable under the ‘Salaries’ head, if-

 

  • Salary that is paid by a foreign country's government to their employees who are serving in India.

  • The services are provided in India even if the settlement is made outside India.

  • Leave salary that is paid to the employees who are outside India regarding leaves that are earned in India shall be deemed to arise or accrue in India and taxed under the ‘Salary’ head.

Employment vs Agency

With employment, the payee and the payer have an employee-employer relationship. The income that is earned under this relationship is recognised as ‘Salary’. Alternatively, the relationship under agency is that of an agent and a principal. Moreover, the income that is earned by an agent is known as ‘Business Profits’.

Forgoing vs Surrendering Salary

There can be events where an employee decides to forgo his/her salary, i.e. the employer does not have to give any salary to him/her. In such an instance, it will be considered that the salary was accrued by the employee. Therefore, the salary will be taxed even when the employee did not receive any income from the salary. 

 

Nevertheless, if the employee wants to surrender his/her salary to the Central Government, the salary that is rendered will be exempt from the tax deduction.

What are the conditions under which the salary is taxable in India?

The salary u/s 17(1) that is accrued in India is taxable under the ‘Salaries’ head, if-

  • Salary is paid by a foreign government to their employees who are serving in India

  • Services are provided in India even if the payment is made outside the country

  • Employees are working abroad but accruing leave entitlement in India and receive leave salary

FAQs

What is Salary as per Section 17(1) of the Income Tax Act?

The word ‘salary’ has been established under Section 17( 1) of the Income Tax Act, 1961, to include perquisites, salary, and profits instead of a salary.

What are perquisites?

Perquisites are benefits that are provided along with salary due to the employee’s position in the company. This may be provided in kind or cash. Some examples include interest-free loans, club fee payments, rent-free accommodation, educational expenses, etc.

What is wages?

A sum of money that is paid under contract to the employee by the employer for services that are rendered is called wages.

How is pension taxed?

Pension received by an individual from his former organization is taxable under ‘salaries’. On the other hand, the pension received on the person’s death by family members (Family Pension) is taxed as ‘Income from other sources’.

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