What is a Salary under section 17(1)?

Under Section 17(1), the term “salary” includes any payment received by an employee from
an employer in cash, kind, or as a facility. It encompasses various components such as basic
salary, allowances, bonuses, commissions, perquisites, and profits instead of salary. The
definition of salary is comprehensive and covers a wide range of remuneration received by
employees in the course of their employment, the amount received by the employee from
his employer in any of the following terms will be considered “Salary” for income tax
purposes:

1. Wages- A sum of money paid under contract by the employer to the employees for
services rendered is called wages. The employee may generally receive it under
various names such as basic pay, salary, remuneration, etc.

2. Annuity or Pension – Annuity or pension is the payment received from the previous
or present employer after attaining retirement. It may be a payout from the pension
plans created by the employer.
 Annuity received from a present employer is taxed as ‘Salary’.
 Annuity received from a previous employer is taxed as ‘Profits instead of Salary’.

3. Profits instead of Salary or Wages-

These payments include:
 Employment termination compensation or employment terms modification
compensation.
 Payment due or received from an unrecognized provident fund or an unrecognized
superannuation fund to the extent of contribution by the employer and interest on
the employer’s contribution.
 Payments from the keyman insurance policy and the sum allocated as a bonus on
such policy.
 Any amount received from any person before joining or after cessation of the
employment is also termed as ‘profits instead of salary’.

4. Gratuity- A lump-sum amount voluntarily paid by the employer to the employee as a

token of appreciation for the services rendered to the organization is gratuity. The
concept of gratuity is statutorily recognized under The Payment of Gratuity Act, of
1972.

5. Fees- An amount received as fees to the employee from the employer for the
services rendered is included in the definition of salary.
6. Commission- Any amount of commissions given to the employee for the services
provided shall form part of the salary. If the employee receives a fixed commission as
a percentage of the sales or profits, it shall be considered salary.

7. Perquisites- Perquisites are additional benefits received over and above the salary
due to the employee’s official position. It may be provided in cash or kind. For
example, club fee payments, interest-free loans, educational expenses, rent-free
accommodation or concession in accommodation rent, and insurance premiums paid
for employees.

8. The advance Salary- Payments received in a financial year are advance salary
payments before the year they are due. A loan taken by the employer is not an
advance salary.

9. Leave encashment- The government and some private employers compensate

employees for the accumulated leaves. They can give the payment during the service
or after retirement or resignation. The payment received for the encashment of
leaves unveiled during the service period will form part of the salary.

10. Employee Provident Fund- Contributions by the employer exceeding 12 percent of

salary or the annual interest exceeding the rate notified by the Central Government
(FY 2023-24 EPF interest rate is 8.25%) on balance to the credit of an employee’s
recognized provident fund.

11. Transfer PF balance- The taxable portion of the transferred balance from an
unrecognized provident fund to a recognized provident fund will be considered
salary.

12. National Pension Scheme (NPS)- A contribution made by the Central Government or
any other employer in a financial year in an employee’s account under the National
Pension Scheme (NPS) will form part of the salary.
 Deductions/Allowances allowed to a salaried employee
‘Salary’ is the first head of income. The income taxable under this head shall be
calculated on the due basis or the receipt basis, whichever occurs earlier. Taxable
salary shall include taxable allowances, perquisites, retirement benefits, and profit
instead of salary. Certain deductions are also allowed from salary income.
Taxability of Allowances
Allowances are additional components of salary that are regularly given to the
employees to meet the expenditure for particular purposes. Allowances are generally
fixed irrespective of actual expenditure and are taxable. Under the Act, it is taxable
under Section 15 on a “due or accrual basis”, irrespective of whether it is paid in
addition to or instead of salary. However, some exemptions are allowed by the
Income-tax Act.
Types of Allowances-

Types of Allowances

Fully Taxable Partly Taxable

Fully Taxable Allowances –

Allowance Description
1. Dearness Allowance Dearness Allowance is provided to an
employee to compensate for
the effect of rising prices and
inflation.
2. Overtime Allowance Allowance is given to employees for
working overtime.
3. City Compensatory Allowance City Compensatory Allowance is paid
by employers to their employees to
compensate them for the high cost of
living in metro cities.
4. Transport Allowance to Transport allowance granted to an
employees other than blind/ employee to meet his
 deaf and dumb/ orthopedically expenditure to commute between
handicapped employees. the place of
his residence and the place of his
duty is fully taxable. However,
for blind/deaf and dumb/
orthopedically handicapped
employees, an exemption of up to Rs.
3,200 per month is provided.
5. Medical Allowance, Tiffin Are taxable under Section 15
Allowance, and Servant
Allowance.

Partially Taxable Allowances –

1. House Rent Allowance is paid Minimum of the following three
by the employers to the amounts:
employees to meet the cost of  HRA Received Actual house
a rented house taken by them. rent paid minus 10% of salary
[Section 10(13A)]  50% of salary (if the residence
is in Delhi, Mumbai, Kolkata,
or Chennai),
 otherwise 40% of salary.
2. Transport Allowance granted to Lower than 70% of such transport
an employee working in any allowance or Rs. 10,000 per month.
transport system to meet his
expenditure during the
performance of his duties for
going from one place to
another, provided he does not
receive the daily allowance.
3. Children's Education Allowance Up to Rs. 100 per month per child for
- Granted to meet the tuition a maximum of 2 children.
fees of a maximum of two
children
4. Hostel Allowance - Granted to Up to Rs. 300 per month per child for
meet the Hostel expenditure of a maximum of 2 Children.
a maximum of two children
5. Office Duty Allowances- These allowances are exempt to the
 Travelling allowance extent of
 Conveyance allowance a minimum of actual allowance
  Daily Allowance received or actual amount spent for
 Helper allowance duties of employment.
 Research allowance
 Uniform allowance
6. Border Area Allowance, Varies from Rs. 200 per month to Rs.
Remote Locality Allowance, 1,300 per month.
Disturbed Area Allowance, or
Difficult Area Allowance
7. Underground Allowance Up to Rs. 800 per month
granted to employees working
in uncongenial, unnatural
climates in underground mines
8. High Altitude Allowance a) Up to Rs. 1,060 per month (for an
granted to the armed forces altitude of 9,000 to 15,000 feet)
operating in high-altitude areas b) Up to Rs. 1,600 per month (for an
altitude above 15,000 feet)

Deductions from Salary [Section 16]

The income-tax Act allows three deductions from the salary income, i.e.,
Standard Deduction, deduction for Entertainment Allowance, and Deduction
for Professional Tax. The standard deduction is allowed to every employee
whose income is taxable under the head salary. In contrast, the other two
deductions are allowed subject to certain conditions.
1. Standard Deduction
This deduction is available to all employees drawing salary income, including
retired employees drawing pension income. The Standard Deduction is
absolute and unconditional, and the employee is not required to furnish any
supporting evidence to claim this deduction. The deduction is the same for all
employees with a ceiling of Rs. 50,000, irrespective of the salary drawn.
2. Entertainment Allowance
The entertainment allowance received by an employee is taxable. If such
entertainment allowance is received by a Government employee, a deduction
is allowed to him while computing the taxable income under the head salary.
However, no deduction is allowed under this provision to a taxpayer who is not
an employee of any Central or State Government. The amount of deduction
allowable to the Govt. employee for the Entertainment allowance shall be
lower of the following:
 Actual amount of entertainment allowance received during the previous
year
 20% of salary exclusive of any allowance, benefit, or other perquisites
 Rs. 5,000
Professional tax
Professional tax paid by the employee, by way of deduction from his salary, is
allowed as a deduction from the taxable salary income. Even if paid in advance,
the professional tax paid during the year is deductible from the salary income.
If the employer pays the professional tax out of his pocket, without deducting it
from the employee’s salary, then it shall be first included in the employee’s
income as a perquisite. After that, a deduction on such professional tax is
allowed from gross salary.