Taxation Laws
Income from Salaries: Sections 15 to 19, Income-tax Act 2025
Salaries is the first of the five heads of income. It taxes what an employee receives from an employer because of the employment, whether in cash or in kind. Sections 15 to 19 of the Income-tax Act, 2025 correspond to sections 15 to 17 of the 1961 Act, with perquisites, profits in lieu of salary and deductions now in separate sections. This note covers who is an employee, what counts as salary, and the deductions allowed.
1. The Five Heads and Salary
- Section 13. Income is classified under five heads: salaries; income from house property; profits and gains of business or profession; capital gains; and income from other sources.
- Mutually exclusive. Each head is self-contained; income falling under a specific head cannot be taxed under another.
- Employer-employee relationship. Salary arises only from a contract of service. Whether a person, such as a managing director, is an employee depends mainly on the degree of control the employer exercises over the manner of his work.
2. What Is Taxed
Figure 1: Building up income from salaries
- Charge, s.15. Salary is taxed under this head; arrears received during the year are taxed in that year, with relief for the effect of bunching.
- Salary, s.16. An inclusive definition covering basic pay, dearness allowance, bonus, commission, taxable pension, gratuity and leave encashment beyond exempt limits, and employer contributions beyond prescribed limits.
- Perquisites, s.17. Benefits in kind such as rent-free or concessional accommodation, use of a car, concessional loans and specified ESOPs, valued under the Income-tax Rules, 2026.
- Profits in lieu of salary, s.18. Compensation on termination or modification of employment and similar receipts, which are taxed as salary.
3. Deductions and Common Items
Figure 2: Deductions and treatment of common items
- Standard deduction, s.19. A flat deduction for salaried employees and pensioners; Rs 75,000 under the new regime and Rs 50,000 under the old regime.
- Professional tax. Tax on employment paid to the State is deductible from salary.
- Other deductions. Deductions for investments, insurance and similar items are claimed from gross total income under the chapter on deductions, not under this head (Topic 19)
⚠ Exam trap Salary requires an employer-employee relationship, and control is the main test. The 2025 Act deals with salaries in ss.15 to 19: charge (s.15), salary (s.16), perquisites (s.17), profits in lieu of salary (s.18) and deductions (s.19). The standard deduction is Rs 75,000 under the new regime and Rs 50,000 under the old. Professional tax is deductible. Arrears are taxed when received, with relief for spreading. |
4. Frequently Asked Questions
Is a director's remuneration always salary?
No. It is salary only if the director is an employee, which depends on whether the company controls the manner in which he works. Fees paid to a non-executive director for attending meetings are taxed as income from other sources or business income.
What is the standard deduction under the new tax regime?
Rs 75,000 for salaried employees and pensioners, compared with Rs 50,000 under the old regime.
5. Related Topics
- Topic 10: Charge of Income Tax and Key Definitions. Income and total income.
- Topic 14: Income from House Property. The second head.
- Topic 19: Deductions, Rebate and the Tax Regimes. Old and new regimes.