Summary: The provisions relating to income chargeable under the head Salaries are contained in Section 15 to 19 of the Income Tax Act, 2025 (“ITA, 2025”). A section-wise summary of the provisions relating to salaries under the ITA, 2025 is set out below. Section 15 of the ITA, 2025 is the principal charging provision for salary income and covers salary due from an employer, salary paid or allowed although not due, and arrears of salary not previously charged to tax. The existence of an employer employee relationship is the fundamental condition for taxation under the head Salaries, while the substance of the legal relationship between the payer and recipient determines the tax character of a payment. Section 16 provides an inclusive definition of salary covering wages, annuity or pension, gratuity, fees or commission, perquisites, profits in lieu of or in addition to salary or wages, advance salary, leave-related payments, taxable provident fund amounts and specified pension contributions. Section 17 deals with perquisites, including accommodation, benefits and amenities, ESOPs and specified securities, employer-paid obligations, insurance contributions and retirement fund contributions, as well as specified medical and related benefits. Rule 15 of Income Tax Rules, 2026 provides the valuation mechanism for various perquisites. Section 18 covers profits in lieu of salaries, including specified employment-related compensation, payments connected with commencement or cessation of employment, certain fund payments and keyman insurance policy receipts. Section 19 provides deductions from salaries, including employment tax, standard deduction and specified retirement benefits. The exemption of various allowances is governed by Schedule III under Section 11 of the ITA, 2025, with applicable limits and conditions provided under Rules 278 to 280 of the Income Tax Rules, 2026.
Income under the head Salaries:
Section 15: Salaries
The provisions relating to income chargeable under the head Salaries are contained in Section 15 to 19 of the Income Tax Act, 2025 (“ITA, 2025”). A section-wise summary of the provisions relating to salaries under the ITA, 2025 is set out below:
Section 15: Salaries
Section 15 of the ITA, 2025 is the principal charging provision for salary income. It provides that the following income is chargeable under the head Salaries:
1. Salary due from an employer to an assessee during the tax year, whether paid or not;
2. Salary paid or allowed during the tax year by or on behalf of an employer, although it was not due; (Advance Salary) and
3. Arrears of salary paid or allowed during the tax year, where such arrears have not already been charged to tax in an earlier tax year.
This section further provides that:
- Employer includes a former employer
- Where salary paid in advance has already been included in the total income of a person for a tax year, it shall not be included again when the salary subsequently becomes due.
- Any salary, bonus, commission received / due from partnership firm to a partner, the same shall not be taxable under the head salaries.
The existence of an employer employee relationship is the fundamental condition for taxation under the head Salaries and where such a relationship does not exist, the income may instead be taxable under another appropriate head, such as Profits and Gains of Business or Profession or Income from Other Sources. The mere fact that a payment is described as salary, remuneration, commission or fees does not determine its tax character. The substance of the legal relationship between the payer and recipient is critical.
The courts have consistently distinguished a contract of service from a contract for services. A contract of service ordinarily establishes an employer employee relationship, whereas a contract for services generally represents an independent professional or contractual relationship.
Section 16: Meaning and Scope of Salary
Section 16 of the ITA, 2025 provides an inclusive definition of salary. It expressly includes:
- Wages;
- Annuity or pension;
- Gratuity;
- Fees or commission;
- Perquisites;
- Profits in lieu of, or in addition to, salary or wages;
- Advance salary;
- Payment received for leave not availed of;
- Taxable annual accretion to a recognised provident fund;
- Taxable transferred balance of a recognised provident fund;
- Contributions by the Central Government or another employer to an employee’s specified pension scheme; and
- Contributions by the Central Government to the Agniveer Corpus Fund in specified circumstances.
Section 17 Perquisites
Section 17 of the ITA, 2025 defines the scope of perquisites for taxation under the head Salaries. It covers various benefits and amenities provided by an employer to an employee, whether free of cost or at a concessional rate.
Under Section 17(1), taxable perquisites include, broadly:
- Rent-free accommodation provided by the employer.
- Concessional accommodation where the prescribed value exceeds the rent paid/payable by the employee.
- Free or concessional benefits/amenities, particularly for directors, employees having substantial interest in the company, and employees whose monetary salary exceeds the prescribed limit (The prescribed limit is INR 4,00,000).
- ESOPs / specified securities / sweat equity shares provided free or at a concessional price. The taxable value is generally based on the fair market value on the date the option is exercised, less the amount paid by the employee.
- Amounts paid by the employer for an obligation that would otherwise have been payable by the employee.
- Certain employer-paid life insurance/annuity contributions.
- Employer contributions exceeding ₹7.5 lakh in a tax year to specified retirement funds/schemes, including recognised provident fund, the specified pension scheme and approved superannuation fund.
- The annual accretion (interest, dividend or similar amount) relating to such taxable excess contributions
Section 17(2) excludes certain employer-provided medical and related benefits from being treated as taxable perquisites in the hands of an employee. This includes the below provisions:
- Medical treatment in employer-maintained hospitals:The value of medical treatment provided to the employee or their family in a hospital maintained by the employer is exempt.
- Treatment in specified hospitals:Reimbursement of actual medical expenses incurred by the employee or family members is exempt where treatment is received in Government/local authority hospitals or other approved hospitals. This also covers treatment of prescribed diseases or ailments in hospitals approved by the competent tax authority.
- Employer-paid health insurance:Premiums paid by the employer for health insurance of the employee are exempt, provided the insurance scheme is approved by the Central Government or IRDAI.
- Reimbursement of employee-paid health insurance:Amounts paid by the employer towards health insurance premiums paid by the employee for themselves or their family are also exempt, subject to the prescribed approval conditions.
- Commuting expenses:Expenditure incurred by the employer for providing or facilitating transport between the employee’s residence and place of work is exempt.
- Medical treatment abroad:Employer expenditure or reimbursement towards medical treatment of the employee or family members outside India, including overseas travel and stay for treatment, is exempt. The exemption also extends to the travel and stay of one attendant accompanying the patient.
Rule 15 of Income Tax Rules, 2026 lays down the valuation mechanism for various perquisites provided by an employer, including accommodation, motor cars, domestic services, utilities, education facilities, loans, gifts and vouchers, meals, movable assets and other benefits. The rule specifies the manner and monetary values to be adopted for determining the taxable portion of such benefits, with different valuation methods depending on the nature and use of the perquisite.
The Rule 15 also revise several monetary limits to reflect current values. For example, the tax free threshold for employer-provided gifts, vouchers or tokens has been increased to ₹15,000 per tax year, while the exempt value for meals has been increased to ₹200 per meal, subject to the prescribed conditions.
For motor-car benefits, Rule 15 introduces revised standard valuation amounts. Where an employer-owned car is used partly for official and partly for personal purposes, the monthly perquisite value is generally ₹5,000 for cars with engine capacity up to 1.6 litres and ₹7,000 for cars above 1.6 litres, with an additional ₹3,000 per month where a chauffeur is provided
Section 18: Profits in lieu of salaries
Section 18 of the ITA, 2025 deals with profits in lieu of salaries.
This category is designed to capture certain employment-related receipts that may not constitute ordinary periodic salary but nevertheless arise because of the employment relationship.
The provision is particularly relevant to:
- Any compensation due or received by assesse from his employer or former employer at or in connection with termination or modification of terms of employment.
- Any amount due or received by assesse from any person before his joining and after cessation of his employment with that person.
- Any payment due or received by assesse:
-From an employer or former employer
-From provident or any other fund other than employee contribution and interest on such
employee contribution
-Any sum received under keyman insurance policy including sum allocated by way of Bonus.
Section 19 : Deduction from salaries
Section 19 of the ITA, 2025 provides for deduction from salaries.
The income chargeable under the salaries shall be computed after the below deductions:
- Employment Tax : Entire actual amount paid
- Standard deduction: INR 75,000 (New Tax regime) and INR 50,000 (In case of old Tax regime)
- Retrial benefits (Gratuity, Pension, leave encashment etc): As per limits specified in section.
Further, apart from deduction u/s 19, the exemption of various allowances is governed by schedule III (Table S. No. 8 to 13) under section 11 of ITA, 2025. The limit of allowances like LTC, HRA and other allowances is included in rule 278 to 280 of Income Tax Rules, 2026, including the prescribed limits and conditions under Rule 280.
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