What is Salary Under Section 17(1) of Income Tax Act? Know Details

Salary is a frequently used head of income while filing returns for income tax. According to the Income Tax Act of 1961, ‘Heads of Income’ is the classification of income earned by an individual such as 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) of Income Tax Act.

Let us understand how Section 17 of income tax act explains the meaning of salary and the various other components that come under it.

The word ‘salary’ has been established under Section 17( 1) of 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.

Section 17(1) of Income Tax Act gives a list of incomes that are categorised as salary-

• Wages  

• Gratuity 

• Annuity or pension 

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

• Amount transferred from unrecognised provident fund (PF) to recognised provident fund Contribution of employer to a recognised PF in excess of the limit that is prescribed Leave encashment 

• Compensation for variation in service contract 

• Advance of salary 

• Contribution made by the central government

Section 15 of the IT Act deals with the basis of charge of salary income. Salary is chargeable to tax either on ‘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 of any salary that is paid to the employee during a particular year and not charged to tax in previous years.

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.

As mentioned before, 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’.

An employee is supervised and controlled by an employer. The employer’s instruction must be followed by the employee. On the other hand, an agent can choose to finish a task or achieve a target as per his style and understanding of working.

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