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Section 17(1) – Definition of Salary under the Income Tax Act

Updated on :  

08 min read.


A salary is a form of fixed compensation given to a person for performing work during a specified period. However, in income tax, the definition of salary also includes various other forms of payments offered by the employer to the employee. Let us know the meaning of salary as per the Income Tax Act.

Definition of Salary as per Income Tax Act

Sub-section(1) of Section 17 of the Income Tax Act provides an inclusive definition of “Salary”. It is a much broader term than it is usually understood. In a financial year, the amount received by the employee from his employer in any of the following forms will be considered “Salary” for income tax purposes:

  • 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. The payment may be for paid leaves, actual work, or the actual amount received or due during the relevant previous year.
  • 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 in lieu of Salary’.
  • Profits in lieu 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 in lieu of salary’.
  • 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, 1972.
  • Fees- An amount received as fees to the employee from the employer for the services rendered is included in the definition of salary.
  • 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.
  • 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, insurance premium paid for employees.
  • The advance Salary- Payments received in a financial year are advance salary payments before the year they are actually due. A loan taken by the employer is not an advance salary.
  • 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 encashment of leaves unavailed during the service period will form part of the salary.
  • 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 2021-22 EPF interest rate is 8.1%) on balance to the credit of an employee’s recognized provident fund.
  • Transfer PF balance- The taxable portion of the transferred balance from an unrecognized provident fund to a recognized provident fund will be considered salary.
  • 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 National Pension Scheme (NPS) will form part of the salary.

What is the basis of the charge of salary income?

Section 15 of the Income Tax Act deals with the basis of charge. Salary shall be chargeable to tax either on ‘due basis’ or ‘receipt basis’, whichever is earlier. For further clarification, income from salary during the year shall consist of the following:

  • Any amount paid in advance to the employee before it became due or payable.
  • Whether paid or not, any salary due to the employee during the year.
  • Arrears of salary paid to the employee during the year and not charged to tax in any earlier years.

Place of accrual of salary

Salary accrues in India and is taxable under the head ‘Salaries’, if-

  • The services are rendered in India even if the payment is made outside India,
  • Salary paid by the Government of the foreign country to their employees serving in India,
  • Leave salary paid to the employees outside India regarding leaves earned in India shall be deemed to accrue or arise in India and taxed under the head ‘Salary’.

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