Income from salaries

1. The charge: section 15 [section 15]

Under section 15(1) of the Income-tax Act, 2025 the following are chargeable under the head “Salaries”:

• (a) salary due from an employer (or former employer) in the tax year, whether paid or not;
• (b) salary paid or allowed in the tax year though not yet due, or before it became due (advance salary); and
• (c) arrears of salary paid or allowed in the tax year, if not taxed earlier.

Salary is therefore taxed on the due basis or receipt basis, whichever is earlier, and never twice (section 15(3)). Any salary, bonus, commission or remuneration received by a partner from his firm is not salary (section 15(4)); it is business income of the partner. “Employer” includes a former employer (section 15(2)), so pension is salary.

The relationship is one of master and servant: the employer controls what is done and how it is done. A professional or agent who works independently earns business or professional income, not salary. Remuneration of a director is salary only if he is an employee of the company; sitting fees are other sources. Salary from a foreign employer for work in India is deemed to accrue in India (section 9(3)).

2. “Salary” includes: section 16 [section 17(1)]

Wages; any annuity or pension; gratuity; fees or commission; perquisites; profits in lieu of or in addition to salary; advance of salary; leave encashment; the taxable part of the annual accretion to a recognised provident fund and of the transferred balance; and the employer’s contribution to the National Pension System account under section 124 [section 80CCD] and to the Agniveer Corpus Fund.

3. Perquisites: section 17 [section 17(2)]

• Rent-free accommodation, or accommodation at a concessional rate, valued as prescribed in the Rules.
• Any benefit or amenity provided free or at a concessional rate to a director, to an employee with a substantial interest in the company, or to an employee whose monetary salary exceeds the prescribed amount (the old “specified employee”).
• Specified securities or sweat equity shares allotted free or at a concession (ESOPs).
• Any obligation of the employee paid by the employer (for example his rent, his club bill, his income-tax on non-monetary perquisites unless the employer opts to bear it under section 392(2)).
• Life insurance or annuity premium paid by the employer, other than to approved funds.
• Employer’s contribution to recognised provident fund, NPS and approved superannuation fund in excess of ₹7,50,000 in aggregate in a tax year, and the accretion on that excess.

Section 17(2) excludes, among other things, medical treatment in a hospital maintained by the employer and certain medical expenditure.

4. Profits in lieu of salary: section 18 [section 17(3)]

Compensation on termination of employment or modification of its terms; amounts received from an employer before joining or after leaving employment (joining bonus, non-compete payment); and payments from an unrecognised fund to the extent not representing the employee’s own contributions; sums received under a Keyman insurance policy.

5. Exempt allowances and terminal benefits

The 2025 Act moves most of these into section 19 and the Schedules.

• House rent allowance: exempt to the prescribed extent if the employee actually pays rent for a house not owned by him: Schedule III (Table: Sl. No. 11) [section 10(13A)].
• Leave travel concession: Schedule III (Table: Sl. No. 8) [section 10(5)].
• Gratuity: fully exempt for Government employees; for employees covered by the Payment of Gratuity Act, 1972 and others, exempt within the statutory formula and ceiling: section 19 (Table: Sl. Nos. 3 to 6) [section 10(10)].
• Commuted pension: section 19 (Table: Sl. Nos. 7 to 9) [section 10(10A)]. Uncommuted pension is fully taxable.
• Retrenchment compensation and voluntary retirement compensation within limits: section 19 (Table: Sl. Nos. 10 to 12) [sections 10(10B) and 10(10C)].
• Leave encashment on retirement: section 19 (Table: Sl. Nos. 13 and 14) [section 10(10AA)].

Most of these exemptions are not available to an employee who stays in the default new regime under section 202; see section 202(2) for the list of exemptions and deductions that are withdrawn.

6. Deductions from salary: section 19 [section 16]

• Standard deduction: ₹75,000 or the salary, whichever is less, where tax is computed under the new regime in section 202(1); ₹50,000 or the salary in any other case (section 19, Table: Sl. No. 2) [section 16(ia)].
• Tax on employment (professional tax) paid under Article 276(2), up to ₹2,500 (Table: Sl. No. 1) [section 16(iii)]. Not allowed under the new regime.

Where arrears or advance salary push the employee into a higher slab, relief is available under section 157 [section 89]. The employer deducts tax at source on salary at the average rate under section 392 [section 192].

7. Format for computing taxable salary (January 2026, Q. 9(a))

Give a format for determining the taxable income from salary.

• 1. Basic salary (due or received, whichever is earlier)
• add 2. Dearness allowance, bonus, commission, fees
• add 3. Allowances: fully taxable allowances (city compensatory, overtime, etc.) and the taxable part of partly exempt allowances (HRA beyond the Schedule III limit, etc.)
• add 4. Perquisites under section 17: rent-free or concessional accommodation, benefits to directors and specified employees, ESOPs, obligations met by the employer, excess retirement contributions
• add 5. Profits in lieu of salary under section 18
• add 6. Retirement benefits: pension, gratuity, commuted pension, leave encashment, less the exempt portion under section 19 (Table)
• = 7. Gross salary
• less 8. Deductions under section 19: standard deduction (₹75,000 new regime / ₹50,000 old regime) and professional tax (old regime only)
• = 9. Income chargeable under the head “Salaries”
• This figure goes into gross total income with the other heads; Chapter VIII deductions (old regime) are taken off gross total income, not off salary.

8. Short worked example

An employee opting for the old regime receives basic salary of ₹6,00,000, DA of ₹60,000, HRA of ₹1,20,000 (of which ₹80,000 is exempt under Schedule III), and pays professional tax of ₹2,400. Gross salary = 6,00,000 + 60,000 + 40,000 (taxable HRA) = ₹7,00,000. Less standard deduction ₹50,000 and professional tax ₹2,400. Income from salary = ₹6,47,600. Under the new regime the HRA exemption and professional tax would be lost and the standard deduction would be ₹75,000: 7,80,000 − 75,000 = ₹7,05,000, but the lower slab rates and the rebate under section 156 [section 87A] (full rebate up to total income of twelve lakh rupees, capped at ₹60,000) may still make it the better choice.

How this is examined

January 2026 (100-mark paper) Q. 5: define the term salary and state the income that falls under the head of salary; Q. 9(a): format for taxable salary. January 2026 (80-mark paper) Q. 2(a): define salary and discuss the mode of computation of tax liability of salary income.

For the essay, follow sections 1 to 6. For the problem, write the format as a vertical computation with the section of the 2025 Act against each line, and mention the regime choice because it changes both the standard deduction and the exemptions.