Introduction:

Section 17 of the Income Tax Act delineates the comprehensive classification of employee benefits offered by an employer into three distinct components: salary, perquisites, and profits in lieu of salary. This section acquaints you with the intricacies of each of these segments.

In this article, we will examine the complexities of Section 17 of the Income Tax Act. This section describes the three main benefits that employers provide to employees: bonuses, perks, and benefits in lieu of wages. Let’s start our search.

Provisions included Under Section 17:

Section 17 of the Income Tax Act encompasses three distinct provisions, each addressing various aspects of employee benefits.

Section 17 (1):

Section 17 describes the key component of an employee benefit plan:

•  Salary -As outlined in Section 17(1), “salary” encompasses the monetary compensation disbursed by an employer to an employee. Such compensation may be offered in various forms, including:
• Advance salary – Any amount of money that an employer distributes to an employee before he or she starts working for the organization is a ‘advance salary’’. It is important to distinguish between loans from employers does not include salary advances.
• Commission – Commission  a fixed percentage of an employee’s remuneration for performing a particular job, falls under the category of salary’. For example, they offer a fixed percentage when a certain sales goal is achieved.
• Gratuity– Gratuity is a lump sum disbursed by the employer as an expression of gratitude for the employee’s dedicated service. Typically, it is granted upon completion of a specified tenure with the organization.
• NPS– Employer contributions to the National Pension Scheme (NPS) are also regarded as part of the employee’s ‘salary’.
• Wage –Wages means the amount of compensation specified in the employment contract for services rendered by an employee. It appears on your payslips under names such as salary, special pay, or salary. Additionally, compensation includes payments made by the employer for paid leave and any balance owed to the employee for work completed.
• Fees-Fee refer to any compensation disbursed by the employer for services rendered by the employee.
• The annuity/pension refers to the amount distributed to the current employer upon reaching retirement age.
• Leave encashment involves employers provide cash benefits in exchange for any accrued but unused vacation money by the employee. This benefit, usually calculated as a percentage of basic compensation, can be distributed during employment or termination. Some employers extend accrued leave to coincide with or follow retirement age.
• If an employee opts for an additional contribution to their provident fund, subject to a tax-attracting limit, this amount should be classified as salary according to Section 17(1) of the Income Tax Act.
• It’s crucial to emphasize that the classification of monetary remuneration as ‘salary’ necessitates the presence of an employer-employee relationship.

Section 17 (2):

• Section 17(2) of the Income Tax Act clarifies the concept of ‘perquisites’ received by an employee from his employer, dividing them into two categories, monetary and non-monetary. 
• Listed below are various employee benefits classified as ‘perquisites’ according to the Income Tax Act:
• The value of rent-free accommodation provided by an employer.
• The employer’s contribution to the provident fund.
• Superannuation benefits provided by the employer.
• The insurance premiums paid by the employer for the employee.
• The value of sweat equity shares or other securities offered free or at a discount by employers to their employees.
• The provision of free water, gas, electricity, or internet connection by the employer.
• Free or paid education for children of employees worth more than ₹1,000.
• Any other expenses paid by the employer on behalf of the employee.
• Benefits of food coupons
• Value of free domestic help provided by the employer where the employee lives.
• The value of any benefit provided at a concessional rate by the employer.
• Employer contributions to deposit insurance policies.
• Gratuity
• The value of concessional rent provided by an employer.

Section 17 (3):

• This provision of Section 17 defines “profits in lieu of salary,” encompassing additional benefits provided by an employer in lieu of basic salary. Typically disbursed in monetary form, these benefits can be challenging to distinguish from regular employee benefits. Hence, the following list of qualifying benefits as “profits in lieu of salary” proves beneficial:
• Amount money  before commencement of work or after termination of employment.
• Unrecognized employer contributions to retirement funds or trust funds.
• Payments made by the employer under a legal obligation.
• Any amount voluntarily paid by the employer.
• Payments made under a Keyman Insurance Policy.
• The compensation received by an employee from an employer at the time of termination of their employment contract or due to modifications in the terms of employment.

Accumulation of Salary:

• Determining the place where salary accrues is pivotal for assessing the taxability of salary income under section 17(1) of the Income Tax Act. Here’s how the place of accrual is established.
• For taxpayers resident in India, all salary income, is liable to tax in India irrespective of whether it is earned in India or abroad. On the contrary, income earned or earned in India is taxable only, irrespective of nationality or citizenship (Section 6).
• Certain exemptions or provisions in double taxation avoidance agreements may include tax treatment of salary income received by persons working in India but receiving their salaries from foreign employers .  In these cases, the provisions described in the DTAA supersede domestic tax laws.
• If a non-resident individual receives salary payments outside India for services rendered within India, such income is taxable in India. However, if the salary pertains to services rendered outside of India, it may not be taxable in India.

Conclusion:

Section 17(1) of the Income Tax Act provides a detailed definition of salary income and prescribes the tax treatment of its components In order to ensure compliance with the Income Tax Act, . it is important that employees and employers understand the provisions of this section.