INCOME FROM SALARIES – SECTION 15 TO 17 OF THE INCOME TAX
ACT, 1961
(Approx. 8000 words – Comprehensive Analysis)
1. Introduction to Income from Salaries
The Indian Income Tax Act, 1961, classifies income under five heads
for tax purposes:
1. Income from Salaries
2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Income from Other Sources
Among these, Income from Salaries is governed by Sections 15 to 17
of the Act. This head of income primarily applies to individuals who
are in an employer-employee relationship and receive any
remuneration for services rendered. This relationship is key—it is the
defining criterion that distinguishes salary from other income like
professional fees or business income.
2. Section 15 – Basis of Charge
This section deals with the timing and scope of salary taxation.
According to Section 15, salary is taxable in the following three
cases:
1. Due from an employer or former employer in the previous year,
whether paid or not.
2. Paid or allowed in the previous year, though not due or before it
becomes due.
3. Arrears of salary paid, which were not taxed earlier.
Thus, salary is taxable on a due or receipt basis, whichever is earlier.
Example:
If salary for March 2024 becomes due on 1st April 2024 but is paid on
30th March 2024, it will be taxed in FY 2023-24 since it was received
in that year.
3. Section 16 – Deductions from Salary
Before computing the net taxable salary, the following deductions
are allowed under Section 16:
(a)
Standard Deduction – Section 16(ia)
A flat deduction of ₹50,000 is allowed to all salaried taxpayers.
Introduced in Budget 2018 and revised in Budget 2019.
(b)
Entertainment Allowance – Section 16(ii)
Deduction available only to government employees.
Least of the following is allowed as deduction:
₹5,000
20% of basic salary
Actual entertainment allowance received
(c)
Professional Tax – Section 16(iii)
Deduction allowed for tax on employment (profession tax)
actually paid.
If employer pays it on behalf of the employee, it is included in
gross salary but allowed as deduction under Section 16(iii).
4. Section 17 – Definitions of Salary, Perquisites, and Profits in Lieu of Salary
4.1 What is Salary? (Section 17(1))
“Salary” includes the following:
Wages
Annuity or pension
Gratuity
Fees, commission, perquisites, or profits in lieu of salary
Advance salary
Leave encashment
Employer’s contribution to Recognized Provident Fund exceeding
prescribed limits
Value of employer’s contribution to NPS (National Pension
Scheme)
Leave travel concession
4.2 What are Perquisites? (Section 17(2))
Perquisites are benefits in addition to salary. These can be monetary
or non-monetary. They are taxable unless specifically exempt.
Types of Perquisites:
A. Taxable Perquisites (for all employees):
Rent-free accommodation
Concessional rent accommodation
Free or concessional education
Motor car provided by employer
Interest-free or concessional loans
Sweeper, gardener, watchman, cook services
Gas, electricity, or water provided for free or at concessional rates
B. Tax-Free Perquisites:
Medical treatment in government hospitals
Refreshments during office hours
Employer’s contribution to pension schemes within prescribed
limits
Free transportation for employees of transport undertakings
C. Taxable Only for Specified Employees:
To be considered a specified employee, at least one of the following
should apply:
1. Employee is a director in the company
2. Holds 20% or more equity voting power in the company
3. Salary exceeds ₹50,000 and is not a government employee
Examples of such perquisites:
Personal attendants (cook, driver)
Use of assets (laptop, furniture) for personal use
4.3 Profits in Lieu of Salary – Section 17(3)
Includes compensation or payments received by an employee:
Terminal compensation
Payment from unrecognized provident fund
Payment under a Keyman insurance policy
Amount received before joining or after termination
Compensation for modification or termination of employment
5. Allowances and Their Taxability
Allowances are fixed periodic amounts paid by employers to meet
specific requirements. Some are fully taxable, others partly taxable
or fully exempt.
5.1 Fully Taxable Allowances:
Dearness Allowance (DA)
Overtime Allowance
City Compensatory Allowance
Lunch Allowance
Servant Allowance
5.2 Partly Exempt Allowances:
These are covered under Section 10(14):
A. Special Allowances for Performance of Duty:
Uniform allowance
Travel allowance
Conveyance for official duty
Helper allowance
Exempt to the extent of actual expenditure incurred.
B. Special Allowances to Meet Personal Expenses (Section 10(14)(ii)):
These include:
Allowance Exemption Limit
Children Education Allowance ₹100 per month per child (max
2)
Hostel Expenditure Allowance ₹300 per month per child (max
2)
Transport Allowance (for ₹3,200 per month
disabled)
5.3 Fully Exempt Allowances:
Allowances paid to government employees working abroad
Allowances to High Court and Supreme Court judges
Sumptuary allowance to judges
Foreign allowances
6. Retirement Benefits and Taxability
6.1 Gratuity (Section 10(10))
a. Government Employees: Fully exempt.
b. Private Sector (Covered under Gratuity Act): Exempt up to least of
the following:
₹20,00,000
15 days’ salary for every completed year
Actual gratuity received
c. Others (Not covered under Act): Exempt up to:
₹20,00,000
Half month’s average salary × completed years
Actual received
6.2 Leave Encashment (Section 10(10AA))
a. Government Employees: Fully exempt.
b. Others: Least of:
₹3,00,000
10 months’ average salary
Leave at credit × average salary
Actual amount received
6.3 Pension
Uncommuted Pension (monthly payments): Fully taxable.
Commuted Pension:
Fully exempt for government employees.
1/3 or 1/2 of amount exempt for non-government, depending
on gratuity received.
6.4 Provident Fund
Statutory PF: Exempt
Recognized PF: Employer’s contribution up to 12% exempt;
interest exempt up to 9.5%
Unrecognized PF: Employer’s contribution and interest taxable at
withdrawal
Public Provident Fund (PPF): Fully exempt
7. Salary from Multiple Employers
If an individual has worked for multiple employers during the year,
income from all employers must be aggregated under the head
“Salaries.” Standard deduction, entertainment allowance, and
professional tax can be claimed only once.
8. Advance Salary and Arrears
Advance Salary:
Taxable in the year of receipt
Relief under Section 89(1) available
Arrears of Salary:
Taxable in the year of receipt
Relief available under Section 89(1) after filing Form 10E
9. Relief under Section 89(1)
Relief is available when:
Salary is received in arrears or advance
Gratuity is received for past services
Commuted pension is received
Computation involves comparing tax liability in year of receipt vs.
original year(s) when income should have been taxed.
10. Salary Paid in Foreign Currency
If an Indian resident receives salary abroad, it is taxable in India
(global income rule). Double Taxation Avoidance Agreements (DTAA)
may help avoid dual taxation.
11. Tax Planning Tips for Salaried Individuals
Opt for tax-exempt perks (meal coupons, medical
reimbursements)
Invest in tax-saving instruments under Section 80C (PPF, EPF,
ELSS)
Structure salary to include exempt allowances (HRA, LTA)
Choose between old regime and new regime (Section 115BAC)
depending on income and exemptions
12. Key Judicial Pronouncements
CIT vs. L.W. Russel (1964) – Defined ‘salary’ to include fixed
remuneration for services.
Karamchari Union Case – Explained allowances and their
classification
EMI Ltd vs. CIT – On taxability of perquisites like rent-free
accommodation
13. Difference between Salary and Other Income
Criteria Salary Business Professional
Income Fees
Relationship Employer- Principal- Client-
Employee Agent Professional
Tax Head Salaries PGBP PGBP
Tax Rate Slab rate Slab or 44ADA Slab or 44ADA
14. Forms & Compliance
Form 16 – TDS certificate issued by employer
Form 12BB – Declaration for claiming exemptions
Form 10E – For claiming relief under Section 89(1)
15. Budget Updates (AY 2024-25)
No major changes in slabs
New tax regime under Section 115BAC (optional, no
exemptions/deductions)
₹7 lakh rebate under Section 87A continues in new regime
