Income from salary.

16 (1)

For the purposes of this Part, “salary” includes—

• (a) wages;
• (b) any annuity or pension;
• (c) any gratuity;
• (d) any fees or commission;
• (e) perquisites;
• (f) profits in lieu of, or in addition to, any salary or wages;
• (g) any advance of salary;
• (h) any payment received by an employee in respect of any period ofleave not availed of by him;
• (i) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax as per paragraph 6 of Part A of Schedule XI;
• (j) the aggregate of all sums that are comprised in the transferred balance as referred to in paragraph 11(2) of Part A of Schedule XI of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub-paragraphs (4) and (5) thereof;
• (k) the contribution made by the Central Government or any other employer in any tax year, to the account of an employee under a pension scheme referred to in section 124; and
• (l) the contribution made by the Central Government in any tax year, to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme referred to in section 125.

Explanation

1. Section Summary

This section defines what constitutes "salary" for income tax purposes under the Income Tax Act. It provides an exhaustive list of components that are treated as salary income, ensuring clarity on what is taxable under the head "Income from Salary."

2. Key Changes

• New Inclusions:
  • Contributions by the Central Government or any employer to an employee’s pension scheme (Section 124) are now explicitly included as part of salary income.
  • Contributions by the Central Government to the Agniveer Corpus Fund (under the Agnipath Scheme, Section 125) are also included as salary income.
• Clarifications:
  • The section now explicitly mentions that annual accretion to the balance in a recognized provident fund and transferred balances are taxable under specific conditions.

3. Practical Implications

• For Employees:
  • Employees must now account for employer contributions to pension schemes and the Agniveer Corpus Fund as part of their taxable salary income.
  • Those with recognized provident funds need to be aware of the taxability of annual accretions and transferred balances.
• For Employers:
  • Employers must ensure accurate reporting of all salary components, including pension scheme contributions and Agniveer Corpus Fund contributions, in Form 16.
• For Tax Authorities:
  • The inclusion of these new components ensures better tracking and taxation of income, reducing potential loopholes.

4. Critical Concepts

• Recognized Provident Fund: A provident fund approved by the Commissioner of Income Tax. Taxability of contributions, interest, and withdrawals depends on the fund’s status and the employee’s service duration.
• Annual Accretion: The interest earned on the balance in a recognized provident fund, which may be taxable under certain conditions.
• Transferred Balance: The balance transferred from one recognized provident fund to another, which may be taxable if specific conditions are met.
• Agniveer Corpus Fund: A fund created under the Agnipath Scheme for individuals enrolled in the scheme, with contributions by the Central Government.

5. Compliance Steps

• For Employees:
  • Ensure all salary components, including employer contributions to pension schemes and the Agniveer Corpus Fund, are included in income declarations.
  • Verify the taxability of annual accretions and transferred balances in recognized provident funds.
• For Employers:
  • Accurately report all salary components in Form 16.
  • Deduct TDS on taxable salary components, including employer contributions to pension schemes and the Agniveer Corpus Fund.

6. Examples

• Example 1: An employee receives a salary of ₹10,00,000, including ₹50,000 as employer contribution to a pension scheme. The entire ₹10,50,000 is taxable as salary income.
• Example 2: An Agniveer enrolled in the Agnipath Scheme receives ₹5,00,000 as salary and ₹1,00,000 as contribution to the Agniveer Corpus Fund. The total taxable salary is ₹6,00,000.

7. Effective Date/Transition Rules

• The amendments are effective from the date specified in the Finance Act introducing these changes. Taxpayers and employers must comply with the new provisions from the applicable assessment year.

This section ensures comprehensive taxation of salary income, including newer forms of employer contributions, while providing clarity on the tax treatment of provident fund balances and specific schemes like the Agnipath Scheme.