Bailabel Type : non-bailable

Description

Section 17 of the Income Tax Act, 1961, provides the definitions for the terms "salary," "perquisite," and "profits in lieu of salary" for the purpose of income tax calculation. These definitions are important to ensure that taxpayers understand what income components are to be included as part of their total income from salary and other related incomes, and which of them are taxable.

The section is crucial for defining the scope of taxable income for employees or individuals earning from salaried employment. All income received by an employee or a person in relation to their employment is covered under this section, and they are taxed accordingly.

Purpose of Section 17:

• The purpose of Section 17 is to clearly outline what constitutes salary income and the components that fall under salary for income tax purposes.
• It helps determine what income is to be taxed as salary, ensuring consistency and clarity for both the taxpayer and the tax authorities.

Key Provisions of Section 17:

1. Definition of "Salary":

• Salary includes:
  • Basic salary or fixed pay.
  • Allowances (including dearness allowance, house rent allowance, etc.).
  • Bonus, commission, or any other amount received by the employee from the employer in connection with employment.
• Key Point: Salary encompasses all forms of monetary compensation that an employee receives from the employer, in whatever form they are paid, including allowances, incentives, etc.
• Exclusion: The term "salary" does not include reimbursements (e.g., travel reimbursements or medical reimbursements), which are excluded from tax if paid under certain conditions.

2. Definition of "Perquisite":

• Perquisite refers to any benefit or amenity provided by the employer to the employee, over and above the salary, whether in kind (non-cash) or cash.

• Common examples of perquisites include:

  • Free or concessional accommodation (company-provided housing or rent-free house).
  • Car and driver provided for official or personal use.
  • Stock options or employee stock ownership plans (ESOPs).
  • Free meals or refreshments provided by the employer.
  • Interest-free loans or loans at concessional rates.

• Taxability of Perquisites: Some perquisites are fully or partially taxable based on their market value or the benefit derived from them. Specific rules govern the valuation and taxability of perquisites under Rule 3 of the Income Tax Rules.

• Perquisites are categorized as follows:

  • Monetary perquisites: e.g., salary bonuses, incentives.
  • Non-monetary perquisites: e.g., providing free or concessional housing, transportation, etc.

• Examples of taxable perquisites:

  • Employer-provided car: If the employer provides a car to the employee for personal use, it is considered a perquisite and is taxed based on its engine capacity or the cost of the car.
  • Medical benefits: Free medical treatment provided by the employer can be considered a perquisite if it exceeds the exempted limit.

3. Definition of "Profits in Lieu of Salary":

• Profits in lieu of salary refer to any payment or benefits that are given to an employee in place of their salary or due to their employment relationship, which could be in the form of:
  • Retirement benefits: Gratuity, pension, or any other compensation paid on termination of employment.
  • Compensation for voluntary retirement or early retirement schemes (VRS).
  • Severance pay: Amount paid on dismissal, termination, or resignation.
  • Ex-gratia payment: Additional payment from the employer that is made in the form of compensation for services rendered but is not regularly paid as part of the salary.
• These payments or benefits, if received, are treated as profits in lieu of salary and are taxable under the head “Income from Salaries.”
• For example, if an employee receives ex-gratia from their employer upon retirement or resignation, it is considered profits in lieu of salary and will be taxed accordingly.

4. Other Important Inclusions under Salary:

• Bonus: Payments made by the employer as an additional amount to the employee beyond the regular salary.
• Commission: Commission payments, whether in cash or kind, that the employee receives based on business brought in by them.
• Allowances: Different types of allowances are also included under salary, including:
  • House Rent Allowance (HRA): Exempt to some extent under certain conditions, but still forms part of the salary.
  • Dearness Allowance (DA): It is part of salary if it forms part of the basic pay.
  • Special Allowance: Specific allowances given for particular work or nature of duties.
• Employer’s contribution to provident fund or pension fund: Contributions made by the employer to a provident fund or pension fund are included as part of the salary.

5. Exclusions from Salary:

• Retirement benefits: Payments made as a gratuity or pension are excluded, except for specific tax exemptions related to these amounts.
• Reimbursements: For example, reimbursement of actual expenses incurred for official travel, medical expenses, etc., is not taxable.
• Dividend income: Income derived from dividends (unless the employer shares dividends as part of salary) is not taxable under the head salary.

Taxability of Perquisites:

• The value of perquisites is computed based on their market value or cost to the employer.
• Taxable perquisites are included in the total salary income of the employee, and the tax is calculated as per the applicable income tax slab for individual taxpayers.
• Certain perquisites such as rent-free accommodation, free meals, and vehicle facilities have specific provisions for determining their value for tax purposes.

Common Perquisites and Their Taxable Value:

• Rent-Free Accommodation: The value is based on the location of the accommodation (whether in a metro city or not) and the salary of the employee.
• Car with Driver: The taxable value depends on whether the car is used for official purposes or personal purposes.
• Stock Options (ESOPs): Stock options granted at a discounted price are considered taxable at the time of exercise.
• Loans at Concessional Rates: The difference between the interest paid and the market rate of interest is considered a perquisite.

Punishment

Underreporting of Salary Income: If an individual underreports their salary income (including perquisites or profits in lieu of salary) in their tax returns, they may be subject to:

• Penalties under Section 270A for underreporting income.
• Interest under Section 234A, 234B, and 234C for delay in tax payment.
• Prosecution under Section 276C for willfully evading tax.
• Fines or penalties if there is a false claim of exemptions or deductions related to salary income.