The New Income Tax Act, 2025, maintains the established structure for taxing salary income, classifying it into taxable income and perquisites (Section 15-18), allowable deductions (Section 19), and exempted income (Schedule II to VI). Taxable salary includes any amount due, paid, or in arrears, along with a broad definition of “Salary” covering wages, annuities, gratuities, commissions, advances, and employer contributions (like NPS or excess PF contributions). Perquisites are broadly defined to include rent-free accommodation, benefits provided free or at concessional rates, employer payments of employee obligations, and excess aggregate employer contributions to retirement funds (over Rs. 7,50,000). Certain medical and travel-related expenses are explicitly exempted from being treated as perquisites. Deductions under Section 19 include a Standard Deduction (Rs. 75,000 for New Tax Regime or Rs. 50,000 otherwise), tax on employment, and specific limits for amounts like gratuity (Rs. 20 Lakhs maximum), commuted pension, retrenchment compensation (Rs. 5 Lakhs maximum), and leave encashment (Rs. 25 Lakhs maximum for non-government employees). Exempted income also covers certain provident fund interest, scholarships, and specified travel and personal expense allowances.
A. INCOME / PERQUISITES TAXABLE UNDER SALARY:
Section 15 of IT Act, 2025 is a chargeable section for Salary. The following income is taxable under the head “Salary”:
a. Any salary due from an employer (whether or not paid).
b. Any salary paid (though not due)
c. Any arrears of salary, if not taxed in earlier tax year.
(1) The following will not be taxed under Salary:
a. If it is already taxed as salary received in advance in any Tax Year.
b. Any salary, commission etc., received by a Partner of a Firm is not regarded as salary.
(2) Section 16 defines “Salary” includes:
(a) wages;
(b) any annuity or pension;
(c) any gratuity;
(d) any fees or commission;
(e) perquisites; (defined under Section 17)
(f) profits in lieu of, or in addition to, any salary or wages; (defined under Section 18)
(g) any advance of salary;
(h) any payment received by an employee in respect of any period of leave not availed of by him
(i) any contribution made by the employer in excess of 12% of the employee’s salary to a recognised Provident Fund
(j) interest credited to the balance of the recognised Provident Fund in excess of the rate fixed by the Central Government.
(k) contribution made by the employer to NPS
(l) contribution made by Central Govt. to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme.
(3) Section 17 defines “Perquisites” includes:
(a) the value of rent-free accommodation or accommodation provided in concessional rate provided to the assessee by his employer.
(b) the value of any benefit or amenity granted or provided free of cost or at concessional rate.
(c) the value of any specified security or sweat equity shares
(d) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the employee.
(e) any sum payable by the employer to effect an assurance on the life of the assessee or to effect a contract for an annuity
(f) aggregate amount of any contribution, in excess of ₹7,50,000 in a tax year, made to the account of the assessee by the employer—
(i) in a recognised provident fund;
(ii) National Pension Scheme [section 124(1)]; and
(iii) in an approved superannuation fund;
(g) the annual accretion by way of interest during the tax year to the balance at the credit of the fund or scheme referred (f) above (to the extent it relates to the contribution referred to in the said clause in any tax year.
(4) Exempted Perquisites – Section 17(2)
(a) medical treatment provided to an employee or any member of his family in any hospital maintained by the employer.
(b) any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family in any Government Hospital or Hospitals approved by the Government or in respect of prescribed diseases or ailments, in any hospital approved by the Pr. CCIT or CCIT.
(c) Health Insurance premium paid by the employer for employees or his families.
(d) any expenditure incurred by the employer for the use of any vehicle for journey from his residence to his office or other place of work, or from such office or place to his residence
(e) Medical expenditure incurred by the Employer for any employee or family members, outside India, including travel and stay expenses along with 1 attendant. This is subject to the amount permitted by RBI and applicable to employees, whose gross total income is less than the amount as may be prescribed.
(5) Section 18 defines “profits in lieu of salary” includes:
(a) The amount of any compensation due to, or received from his employer or former employer termination of his employment or modification of the terms and conditions.
(b) any amount due to or received before his joining any employment or after cessation of his employment.
(c) any payment due to or received from an employer or a former employer.
(d) any payment due to or received from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions.
(e) any sum received under a Keyman insurance policy as defined in Schedule II, including the sum allocated by way of bonus on such policy.
B. DEDUCTIONS FROM SALARY:
The following amounts are eligible for deduction under section 19:
(a) Tax on Employment
(b) Standard deduction of Rs.75,000 under New Tax Regime (Section 202) or Rs.50,000 in other cases.
(c) Gratuity [Note -1]
(d) Entire amount of Commutation of pension, in case of government employees.
(e) In case of other employees, 1/3rd of the computed amount, if gratuity is received. In any other case, 50% of the computed amount.
(f) Entire amount of Commutation received from LIC or any other insurers under approved pension scheme
(g) Any amount of compensation received on account of retrenchment of service [Note – 2]
(h) Any amount received under Voluntary Retirement Scheme, subject to the maximum of Rs.5 Lakhs
(i) Full amount of Leave encashment of government employees
(j) In case of other employees, the leave encashment can be deducted as per Note – 3.
Note -1: GRATUITY
i. Fully deductible in case of death-cum-retirement gratuity and retiring gratuity received under the Pension Code or related to defence personnel.
ii. Amount received under the Payment of Gratuity Act, 1972 restricted to 15 days of salary for each completed years of service or Rs.20 Lakhs, whichever is lower.
iii. Any amount received as gratuity on his retirement or on termination of his employment, being the lower of the following-
a. Actual gratuity received
b. 20 Lakhs
c. half month’s average salary for each completed year of service.
Salary = Basic + DA
Average Salary = 10 months average salary, immediately preceding the month of retirement / termination.
If the gratuity is received from more than one employer(s), the amount of gratuity to be deducted shall not exceed the amount specified above from all such employers.
Note: 2 Retrenchment Compensation
Lower of the following amount can be deducted-
a. Actual compensation received
b. amount calculated under Industrial Dispute Act,1947.
c. Amount notified by the central Government (presently Rs.5 Lakhs)
If the compensation received is in accordance with any scheme approved by the Central Government, entire amount can be deducted.
Note – 3:
LEAVE SALARY [OTHER THAN GOVT. EMPLOYEES]
Lower of the following can be deducted-
a. No of leave days in credit (maximum of 30 days for every year of actual service) x Salary per day
b. 10 months’ average salary
c. 25 Lakhs
d. Actual amount of leave salary received.
Salary = Basic + DA
Average Salary = 10 months average salary, immediately preceding the month of retirement / termination.
If the leave salary is received from more than one employer, the total deduction shall not exceed the maximum amount specified above.
C. EXEMPTED AMOUNTS RELATED TO SALARY
Section 11 deals with Exempted Income, and Schedule II to the Income Tax Act, 2025 specifies the following amount not to be included in Total Income:
(a) Interest on Provident Fund, if the contribution by employee does not exceed Rs.2.50 Lakhs in a tax year.[Rs.5 Lakhs in cases where there is no contribution made by employer].
(b) Any payment from an approved superannuation fund.
(c) scholarship granted to meet the cost of education.
[read article: https://taxguru.in/income-tax/tax-treatment-employer-sponsored-education-scholarships.html]
(d) Any payment from the National Pension System Trust received by an assessee, who is a subscriber to the Unified Pension Scheme, provided the said payment does not exceed 60% of the Individual corpus.
(e) Any payment from the National Pension System Trust under the NPS, provided the said payment does not exceed 25% of the amount contributed by the assessee.
(f) Value of travel concession or allowance received from employer for himself and his family, in connection with his proceeding on leave or after retirement from service or after the termination of his service to any place in India, subject to the maximum of amount of expenses actually incurred for the purpose of such travel.
(g) Income in the nature of a perquisite, if Such perquisite is not provided for by way of monetary payment, within the meaning of section17(1); and the tax on such income actually paid by his employer, at the option of the employer, on behalf of such employee.
(h) House Rent Allowance (to the extent as may be prescribed*)
(i) Any Special Allowance is not in the nature of a perquisite within the meaning of section 17(1);and such allowance or benefit is specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed*.
(j) Any allowance, is granted to the assessee, to meet his personal expenses at the place where the duties of his office or place of employment of profit are ordinarily performed by him or at the place where he ordinarily resides, to compensate him for the increased cost of living, to the extent as may be prescribed*.
(k) Amount of family pension received
* Rules yet to be notified as on 12-10-2025.
*****
Disclaimer: This article does not deal with the salaries taxable for NRIs / Foreign citizens. Readers are advised to refer to the Income-tax Act, 1961 and the Income-tax Act, 2025 before taking any decision. The author is not responsible for consequences arising from reliance on this article.
Author Bio
