Income from Salary under the Income Tax Act 2025: What Is Taxable (Sections 15 and 16)
Under the Income Tax Act 2025, salary is taxed under the head "Salaries". Section 15 says when a payment is taxed (when it is due or when it is paid, whichever is earlier, plus arrears), and section 16 lists what counts as salary: wages, pension, gratuity, fees, commission, perquisites, advance salary, leave pay and some pension and provident fund items. It covers any employee, and "employer" includes a former employer.
This guide uses the Act as amended by the Finance Act, 2026, in force from 1 April 2026 (tax year 2026-27). It covers the two sections only. Perquisites and the deductions from salary have their own sections. This guide only gives a short overview of the two most common deductions. Every point below carries its section number so you can check it.
When is salary taxed under section 15 of the Income Tax Act 2025?
Section 15(1) charges three kinds of salary to tax in a tax year:
- Salary due to you from an employer in that tax year, whether paid or not (section 15(1)(a)).
- Salary paid or allowed in that tax year by or on behalf of an employer, even if it was not due yet or was paid before it became due (section 15(1)(b)).
- Arrears of salary paid or allowed in that tax year, if they were not charged to tax in any earlier tax year (section 15(1)(c)).
So the tax year of the salary depends on the earlier of two events: it falling due or it being paid. Whether the money reached your bank account is not the test for salary that is already due.
What if salary is paid in advance?
An advance is taxed in the year you receive it, under section 15(1)(b). Section 15(3) then makes sure it is not counted a second time: if salary paid in advance is included in your total income for a tax year, it is not included again when the salary becomes due.
Who is an employer, and what about partners?
Section 15(2) says "employer" includes a former employer, so pension or arrears paid by a past employer fall under the same head. Section 15(4) carves out one group: any salary, bonus, commission or remuneration, by whatever name, due to or received by a partner of a firm from the firm is not salary for this section.
What does "salary" include under section 16?
For this Part, section 16 says salary includes:
| Item | Clause of section 16 |
|---|---|
| Wages | (a) |
| Any annuity or pension | (b) |
| Any gratuity | (c) |
| Any fees or commission | (d) |
| Perquisites | (e) |
| Profits in lieu of, or in addition to, salary or wages | (f) |
| Any advance of salary | (g) |
| Payment received for leave not availed of | (h) |
| Annual accretion to a recognised provident fund balance, to the extent chargeable under paragraph 6 of Part A of Schedule XI | (i) |
| Transferred balance of a recognised provident fund (paragraph 11(2) of Part A of Schedule XI), to the extent chargeable under sub-paragraphs (4) and (5) of that paragraph | (j) |
| Central Government or other employer's contribution to a pension scheme under section 124 | (k) |
| Central Government's contribution to the Agniveer Corpus Fund under section 125 | (l) |
The word is "includes", so these items are definitely in.
Is leave encashment salary?
Clause (h) brings in any payment received by an employee for a period of leave not availed of. Whether and how much of it is then exempt is a separate question that this article does not cover. The first step is that the receipt is salary.
How are employer pension contributions treated?
Clause (k) puts the employer's contribution to the employee's account under a Central Government notified pension scheme into salary. Section 124(1) then allows a deduction for that contribution up to a cap, measured on "salary" as defined in section 124(13)(b): basic pay plus dearness allowance if the terms of employment so provide, and excluding all other allowances and perquisites.
| Employer | Cap on deduction (section 124(1)) |
|---|---|
| Central Government or a State Government | 14% of salary |
| Any other employer | 10% of salary |
| Any other employer, where the employee's total income is taxed under the section 202(1) tables (the default new regime) | 14% of salary (section 124(2)) |
Clause (l) works the same way for Agniveers: the Central Government's contribution to the Agniveer Corpus Fund is salary, and section 125(2) allows a deduction for the whole of it.
What deductions can you claim from salary under section 19?
Once you know what is salary, section 19(1) lets you reduce it by the items in its Table before it is added to your total income. The two that apply to almost every employee are:
| Deduction | Limit (section 19(1) Table) |
|---|---|
| Tax on employment (professional tax under article 276(2) of the Constitution) | Entire amount paid (Sl. No. 1) |
| Standard deduction, tax computed under section 202(1) (default regime) | Rs 75,000 or the salary, whichever is less (Sl. No. 2(a)) |
| Standard deduction, any other case | Rs 50,000 or the salary, whichever is less (Sl. No. 2(b)) |
The same Table also covers gratuity, commuted pension, retrenchment compensation, voluntary retirement and leave salary on retirement. Those have their own limits and are not covered here.
Example (tax year 2026-27). Sunita's salary chargeable under section 15 is Rs 7,20,000 and she paid Rs 2,400 of professional tax. Under the default regime: Rs 7,20,000 - Rs 75,000 - Rs 2,400 = Rs 6,42,600 income under "Salaries". If she opts out of section 202(1), the standard deduction is Rs 50,000, giving Rs 7,20,000 - Rs 50,000 - Rs 2,400 = Rs 6,67,600.
Is the employer's contribution to PF or a pension fund taxed as a perquisite?
Section 17(1)(h) treats as a perquisite the total of your employer's contributions in a tax year, to the extent it exceeds Rs 7,50,000, across three places: a recognised provident fund, the pension scheme in section 124(1), and an approved superannuation fund. Section 17(1)(i) also brings in the yearly interest, dividend or similar accretion on that excess portion. Contributions up to Rs 7,50,000 in total are not caught by this clause.
Worked example 1: salary due but not paid, tax year 2026-27
Assumptions. Ravi is a salaried employee. His monthly salary is Rs 60,000. His employer pays March 2027 salary on 5 April 2027. All other months are paid on time. Tax year: 2026-27.
| Step | Working | Amount |
|---|---|---|
| 1. Months due in tax year 2026-27 | April 2026 to March 2027 = 12 months | 12 |
| 2. Salary due in the year (section 15(1)(a)) | 12 x Rs 60,000 | Rs 7,20,000 |
| 3. Of which paid before 31 March 2027 | 11 x Rs 60,000 | Rs 6,60,000 |
| 4. Due but unpaid on 31 March 2027 | 1 x Rs 60,000 | Rs 60,000 |
| Salary chargeable for 2026-27 | Rs 6,60,000 + Rs 60,000 (due, whether paid or not) | Rs 7,20,000 |
The March salary is taxed in 2026-27 even though it arrives in 2027-28. When it is paid in April 2027, it is not taxed again as an arrear, because it was already charged for 2026-27.
Worked example 2: advance salary and arrears
Assumptions. Meena's employer pays her three months of salary in advance on 20 March 2027. Her monthly salary is Rs 50,000, and the three months are April, May and June 2027. In the same month she also receives Rs 30,000 as arrears of an earlier revision, and none of it has been taxed in any earlier tax year. Her regular salary for April 2026 to March 2027 is Rs 6,00,000.
| Item | Section | Working | Amount in 2026-27 |
|---|---|---|---|
| Regular salary, 12 months | 15(1)(a) | As given | Rs 6,00,000 |
| Advance for April to June 2027 | 15(1)(b) | 3 x Rs 50,000 | Rs 1,50,000 |
| Arrears, not taxed earlier | 15(1)(c) | As given | Rs 30,000 |
| Salary chargeable for 2026-27 | Rs 6,00,000 + Rs 1,50,000 + Rs 30,000 | Rs 7,80,000 |
In 2027-28, when April to June 2027 salary falls due, the Rs 1,50,000 is not included again (section 15(3)). Her 2027-28 salary for those three months starts at nil, since it was already taxed.
Worked example 3: employer pension contribution
Assumptions (tax year 2026-27). Kiran works for a private company. Her basic pay is Rs 8,00,000 and dearness allowance is Rs 1,00,000, which counts under her terms of employment. She also gets Rs 2,00,000 of other allowances. Her employer contributes Rs 1,20,000 to her account under a Central Government notified pension scheme.
| Step | Working | Amount |
|---|---|---|
| 1. Contribution counted as salary (section 16(k)) | Whole contribution | Rs 1,20,000 |
| 2. "Salary" for section 124 (section 124(13)(b)) | Rs 8,00,000 + Rs 1,00,000 (other allowances excluded) | Rs 9,00,000 |
| 3a. Cap if she is taxed under section 202(1) (default regime) | 14% x Rs 9,00,000 | Rs 1,26,000 |
| 3b. Cap if she opts out under section 202(4) | 10% x Rs 9,00,000 | Rs 90,000 |
| 4a. Deduction, default regime | Lower of Rs 1,20,000 and Rs 1,26,000 | Rs 1,20,000 |
| 4b. Deduction, opted out | Lower of Rs 1,20,000 and Rs 90,000 | Rs 90,000 |
The contribution is salary in both cases. The deduction then depends on the cap. Check which regime applies to the person before using this table.
Real-life scenarios
- Ravi changes jobs in January. His former employer owes him a final settlement that is paid in May of the next tax year, but the amount fell due in January. Under section 15(1)(a) and (2), salary due from a former employer in the year it fell due is taxed in that year, paid or not.
- Meena's employer holds back an increment. The revision is approved later and paid with back pay. Section 15(1)(c) taxes the arrears in the year they are paid, provided they were not charged to tax before.
- Suresh is a partner in a firm. He draws a monthly amount and a year-end bonus as per the partnership deed. Under section 15(4) it is not salary for section 15 purposes, so it does not belong under "Salaries".
- Anita retires and gets her pension each month. Pension is salary under section 16(b), and it is paid by a former employer, which section 15(2) covers.
What are the common mistakes?
- Counting only what hit the bank. Salary due in the year is taxed whether or not it has been paid (section 15(1)(a)).
- Taxing an advance twice. Salary taxed when paid in advance is not included again when due (section 15(3)).
- Treating arrears as current-year pay by default. Arrears taxed in an earlier tax year are not charged again under section 15(1)(c).
- Treating a partner's remuneration as salary. Section 15(4) excludes it.
- Ignoring the employer's pension contribution. It is salary under section 16(k) even though you never see it as cash. The deduction is a separate step under section 124.
- Using the wrong salary base for the pension cap. Only basic pay and, where the terms provide, dearness allowance count (section 124(13)(b)).
Quick reference
| Question | Answer | Where |
|---|---|---|
| Salary due but unpaid | Taxed in the year it falls due | Section 15(1)(a) |
| Salary paid before due | Taxed in the year paid | Section 15(1)(b) |
| Arrears | Taxed when paid, if not taxed earlier | Section 15(1)(c) |
| Advance taxed once | Not taxed again when due | Section 15(3) |
| Former employer | Counts as employer | Section 15(2) |
| Partner's remuneration | Not salary | Section 15(4) |
How do CA firms keep salary clients straight?
For a CA firm, the work is spotting the timing issues: advance payments, arrears and year-end dues that sit in a different tax year from the bank credit. Finexo's practice management software keeps your client list, documents and deadlines in one place so these checks happen before filing. It does not compute tax for you.
Where is this in the Act?
- Section 15: when salary is chargeable, advance, former employer, partner's remuneration
- Section 16: what salary includes
- Section 124: pension contribution deduction, including 124(13)(b) for "salary"
- Section 125: Agniveer Corpus Fund deduction
- Section 17(1)(h) and (i): employer contributions above Rs 7,50,000 as a perquisite
- Section 19(1): deductions from salary, including professional tax and standard deduction
- Section 202(1) and (4): default regime and the option to opt out
- Schedule XI, Part A, paragraphs 6 and 11: provident fund items in section 16(i) and (j)
For other posts in this series, see TDS on rent under the Income Tax Act 2025.
This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026). It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.
Frequently Asked Questions
What counts as salary under the Income Tax Act 2025?
Section 16 says salary includes wages, annuity or pension, gratuity, fees or commission, perquisites, profits in lieu of salary, advance salary, leave pay and some provident fund and pension scheme items.
Is salary taxed when it is due or when it is paid?
Salary due in the tax year is taxed whether or not it is paid (section 15(1)(a)). Salary paid before it is due is taxed in the year of payment (section 15(1)(b)), and it is not taxed again when due (section 15(3)).
How are arrears of salary taxed?
Arrears paid or allowed in a tax year are taxed in that year, if they were not charged to tax for any earlier tax year (section 15(1)(c)).
Is a partner's remuneration from a firm salary?
No. Section 15(4) says any salary, bonus, commission or remuneration due to or received by a partner from the firm is not regarded as salary for section 15.
Is pension taxable as salary under the new Act?
Yes. Section 16(b) includes any annuity or pension in salary, and section 15(2) says the employer includes a former employer.
Is the employer's contribution to my pension account part of salary?
Yes, under section 16(k). Section 124(1) then allows a deduction for it up to 14% of salary for a Central or State Government employer, or 10% for other employers (14% if total income is taxed under section 202(1)).
What is the standard deduction from salary under the Income Tax Act 2025?
Section 19(1), Table Sl. No. 2 allows Rs 75,000 (or the salary, if less) where tax is computed under section 202(1), and Rs 50,000 (or the salary, if less) in any other case.
Is professional tax deductible from salary?
Yes. Section 19(1), Table Sl. No. 1 allows the entire tax on employment paid under article 276(2) of the Constitution as a deduction from salary.