The Indian Income Tax Act, 1961, classifies taxable income under five heads—one of the most significant being ‘Income from Salaries’. As the salaried class forms a substantial portion of India’s taxpayer base, understanding the legal framework surrounding this head of income is essential. The provisions for computation, exemptions, deductions, and tax treatment of salary are meticulously outlined in the Act to ensure fairness and clarity.
This article explores the legal provisions governing salary income under Indian taxation law, focusing on components, exemptions, computation methods and relevant case law.
Legal Framework: Relevant Provisions
Income from salary is governed by Sections 15 to 17 of the Income-tax Act, 1961. The classification and computation of salary income are explicitly laid down in these sections.
- Section 15 defines the scope of salary.
- Section 16 provides for deductions from salary income.
- Section 17 defines ‘salary’, ‘perquisite’, and ‘profits in lieu of salary’.
Definition of Salary [Section 17(1)]
Section 17(1) of the Income Tax Act, 1961 defines the term “salary” inclusively to cover a broad range of compensation received by an employee from an employer. Salary includes:
- Wages
- Annuity or pension
- Gratuity
- Fees, commissions, perquisites or profits in lieu of salary
- Advance salary
- Leave encashment
- Employer’s contribution to Provident Fund (above exempt limit)
- Allowances
Taxability of Salary Income [Section 15]
Salary is chargeable to tax on a due or receipt basis, whichever is earlier. This includes:
- Salary due from an employer or former employer (even if not received)
- Salary received in advance or in arrears
- Arrears of salary (even if due in an earlier year)
Components of Salary Income
1. Basic Salary
The core component of salary and forms the basis for many allowances and benefits.
2. Allowances
Allowances are financial benefits given over and above the basic salary. They may be taxable, partially exempt, or fully exempt.
a) House Rent Allowance (HRA) – Section 10(13A)
Exempt up to the least of the following:
- Actual HRA received
- 50% of salary (metro) or 40% (non-metro)
- Rent paid minus 10% of salary
b) Leave Travel Allowance (LTA) – Section 10(5)
Exemption available for two journeys in a block of four years, for travel within India.
Under the new tax regime (Section 115BAC), transport allowance of ₹3,200 per month provided to specially-abled employees is exempt.
3. Perquisites [Section 17(2)]
“Perquisite” refers to any benefit, facility, or amenity provided by an employer to an employee in addition to salary or wages. It includes:
- Rent-free accommodation or accommodation provided at a concessional rate by the employer.
- Benefits or amenities (like a car, club membership, domestic help) provided free or at a concessional rate to certain employees (e.g., directors, those with substantial interest, or those earning above ₹50,000 excluding perquisites).
- Payments made by the employer on behalf of the employee (e.g., discharge of personal obligations).
- Life insurance premiums or annuity contracts paid by the employer (excluding statutory funds).
- Stock options (ESOPs) or sweat equity shares offered at concessional rates or free.
- Employer’s contribution to superannuation fund exceeding ₹1 lakh per annum.
- Any other prescribed fringe benefit or amenity.
Accommodation Valuation Highlights
- If unfurnished, valuation depends on whether it’s employer-owned or rented and the city population.
- If furnished, add 10% of the cost of furniture or actual hire charges.
- Hotel accommodation is taxable if provided for more than 15 days, valued at 24% of salary or actual cost, whichever is lower.
Exceptions – Non-Taxable Perquisites
Perquisites that are not taxable include:
- Medical treatment in employer-maintained hospitals or approved government/private hospitals.
- Health insurance premium paid by the employer under an approved scheme.
- Travel and medical treatment expenses abroad (subject to conditions).
4. Profits in Lieu of Salary [Section 17(3)]
Includes compensation due to:
- Termination of employment
- Modification of terms of employment
- Retrenchment compensation
Deductions from Salary Income [Section 16]
Three standard deductions are allowed:
- Standard Deduction – ₹50,000
- Entertainment Allowance (only for Government employees)
- Professional Tax – As paid (maximum ₹2,500)
These deductions aim to ease the tax burden for salaried individuals.
Taxation of Retirement Benefits
1. Gratuity
- Covered under Section 10(10).
- For government employees – fully exempt.
- Others: Exempt up to ₹20 lakh
2. Pension
Uncommuted Pension: Fully taxable.
Commuted Pension:
Government Employees – fully exempt
Non-Government Employees – partially exempt under Section 10(10A)
3. Leave Encashment
Fully exempt for Government employees.
For others – exemption under Section 10(10AA), subject to a limit of ₹3,00,000.
4. Provident Fund
- Statutory Provident Fund – Fully exempt.
- Recognized Provident Fund – Employer’s contribution exempt up to 12% of salary; interest up to 9.5% is exempt.
- Public Provident Fund – Fully exempt under Section 10(11).
Relief under Section 89
If an assessee receives salary (or family pension) in arrears or advance, or receives salary for more than 12 months in a financial year, or receives any amount treated as “profit in lieu of salary” under Section 17(3), which increases their tax liability due to higher income in that year, they can apply to the Assessing Officer for tax relief.
However, no such relief is allowed if the amount is received under a voluntary retirement or separation scheme, and the assessee has already claimed exemption under Section 10(10C) for any year.
This provision helps ensure taxpayers are not unfairly taxed at higher rates due to delayed or advance salary payments.
Important Case Law
In Gestetner Duplicators (Pvt.) Ltd. v. Commissioner of Income-Tax (1979), the Supreme Court held that commission paid to salesmen under contractual terms forms part of “salary” as defined under Rule 2(h) of Part A of the Fourth Schedule of the Income Tax Act, 1961. The assessee had included commission in computing contributions to a recognised provident fund and claimed deductions under Section 36(1)(iv).
While the High Court rejected the claim, the Supreme Court ruled that such commission, being part of remuneration for services rendered, qualified as salary. It further held that once a provident fund is recognised, the taxing authorities cannot question its compliance unless the recognition is withdrawn by the Commissioner. The Court allowed the deduction and ruled in favour of the assessee.
Income Tax on Salaries: What’s New in 2025
1. Revised Personal Income Tax Slabs (New Regime – FY 2025–26)
To increase the disposable income of the middle class and salaried taxpayers, the government has introduced progressive reforms under the new tax regime:
| Income Slab (₹) | Tax Rate |
|---|---|
| 0 – 4 lakh | Nil |
| 4 – 8 lakh | 5% |
| 8 – 12 lakh | 10% |
| 12 – 16 lakh | 15% |
| 16 – 20 lakh | 20% |
| 20 – 24 lakh | 25% |
| Above 24 lakh | 30% |
No Income Tax for individuals with total income up to ₹12 lakh, after applying slab benefits and standard deduction (₹50,000 for salaried individuals). Tax rebate ensures zero tax liability for salaried individuals with net taxable income up to ₹12 lakh (excluding capital gains).
2. Standard Deduction for Salaried Class
Standard deduction of ₹50,000 continues to be available under the new regime, thereby enhancing net take-home pay for the salaried class.
3. Tax Compliance & Transparency Measures
A new Income-Tax Bill is proposed to simplify taxation, reduce litigation, and enhance taxpayer transparency.
Focus on digital processing of returns, automated refunds, and faceless assessments to ease taxpayer experience.
4. Relief for Arrears and Advance Salary
Although not explicitly detailed in the budget speech, the existing relief under Section 89 of the Income Tax Act continues to apply, allowing tax relief for salary received in arrears or advance.
Conclusion
Income from salaries is a major source of revenue for the government and a vital aspect of tax compliance for individuals. Understanding the classification, exemptions, deductions, and legal provisions under the Income Tax Act is crucial to ensure accurate reporting and optimal tax planning. With the dual tax regime in place, individuals must evaluate their salary components, investment declarations, and allowable deductions to make an informed decision every assessment year. The taxation of salary income continues to be dynamic with evolving regimes and periodic amendments.
References
[1] Income-tax Act, 1961
[2] Gestetner Duplicators Pvt. Ltd. v. CIT, (1979) AIR 607
[3] Treatment of Income from Different Sources, Available Here