What are the different types of income that qualify as Salary under the Income Tax Act?
As a salaried person, you may be getting income in many forms. For the purpose of tax, the incomes that qualify as Salary are listed below:
- Salary: This is generally a monthly remuneration extended by the employer to the employee in exchange for the services provided by the employee.
- Wages: A wage is also monetary compensation paid by an employer to an employee in exchange for work done. However, it is generally calculated as a fixed amount for each task completed, or at an hourly or daily rate, or based on an easily measured quantity of work done.
- Annuity: This is a financial product that doles out regular fixed payments to the investor, primarily used as an income stream for retired individuals.
- Pension: The pension is a periodical allowance or an amount of stipend received by a person on account of a past service or a particular merit of a person. It is actually a compensation for past service and is therefore considered as salary. All contributions to the Pension Fund by the government and employer are treated as salary.
- Gratuity: Gratuity is the sum of money paid by an employer to an employee for his/her rendered services to the organisation for the tenure of his/her services. It is a benefit payable under the Payment of Gratuity Act 1972. It is usually paid at the time of retirement but it can be paid before also. An employee becomes eligible for gratuity only after completion of five years of service with employer.
- Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or Wages: Fees are charged for services rendered. Commission is a part-earning off a profitable deal. Perquisites/perks are non-monetary benefits like rent free accommodation, interest free loans, motor car, etc. extended to employees. Any of these incomes earned in the process of employment as a remuneration for services to the employer is deemed as salary.
- Profits in lieu of salary or wages: This is a bonus or commission or remuneration received by an employee as a reward for work done during the course of employment.
- Advance salary: This is any salary received in advance before rendering the services for which the salary is paid.
- Taxable portion of annual accretion: Where the employee is a member of a Recognised Provident Fund, the amount contributed by the employer in this fund in excess of 12 per cent of the salary of the employee and interest credited on the amount of the fund in excess of the prescribed rate of interest is to be included in the salary income.
- Taxable portion of transferred balance: When an unrecognised provident fund is recognised for the first time, the balance in the unrecognised provident fund is known as “Transferred balance”. The employer’s share (contribution in unrecognised provident fund and interest on employer’s share) is included in the salary income for income-tax purposes at the time of such transfer. All of the above are covered under the scope of section 17 (1) of the Income Tax Act and are treated as Salary for the purpose of taxation.