Income from Salaries — Sections 15–19
INCOME TAX ACT 2025 · CHAPTER IV · PART B · SECTIONS 15–19
Income from Salaries
Complete guide to the head "Salaries" under the Income Tax Act 2025 — chargeability, what is salary, perquisites, profits in lieu of salary, exemptions (HRA, LTA, gratuity, leave encashment, VRS), and deductions (standard deduction, professional tax).
📘 Sections: 15 (Chargeability) · 16 (Definition of salary) · 17 (Perquisites) · 18 (Profits in lieu of salary) · 19 (Deductions from salary)
📋 Key Schedules: Schedule II (exemptions — LIC, PF, NPS receipts) · Schedule III (HRA, LTA, standard deduction, gallantry pension)
🔄 Replaces: Sections 15, 16, 17 of the Income Tax Act 1961
📅 Effective: 1st April 2026 (Tax Year 2026-27 onwards)
📋 Key Schedules: Schedule II (exemptions — LIC, PF, NPS receipts) · Schedule III (HRA, LTA, standard deduction, gallantry pension)
🔄 Replaces: Sections 15, 16, 17 of the Income Tax Act 1961
📅 Effective: 1st April 2026 (Tax Year 2026-27 onwards)
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Section 15 — Chargeability
Replaces Section 15 of the 1961 Act. Income is chargeable under "Salaries" on a due basis or receipt basis — whichever is earlier.
| Clause | What is taxable | Notes |
|---|---|---|
| (a) | Salary due from employer in the tax year, whether paid or not | Accrual basis — taxable when due even if not yet received |
| (b) | Salary paid in advance before it becomes due | Taxable in year of receipt. Will not be taxed again when it becomes due [Section 15(3)] |
| (c) | Arrears of salary received in the tax year, not taxed in any earlier year | Taxable in year of receipt. Relief available under Section 157 (salary arrears relief) |
Former employer included [Section 15(2)]: "Employer" includes a former employer — so payments from a previous employer (terminal benefits, arrears, retrenchment compensation) are also chargeable under this head.
Partner's remuneration NOT salary [Section 15(4)]: Salary, bonus, commission or remuneration paid by a firm to a partner is NOT treated as salary — it is assessed as business income in the partner's hands (under Section 26).
Partner's remuneration NOT salary [Section 15(4)]: Salary, bonus, commission or remuneration paid by a firm to a partner is NOT treated as salary — it is assessed as business income in the partner's hands (under Section 26).
Section 16 — What Constitutes "Salary"
Replaces Section 17(1) of the 1961 Act. "Salary" is an inclusive definition — it covers everything an employee receives from their employer in connection with employment:
(a) Wages
Any wages — daily, weekly, monthly
(b) Annuity or Pension
Regular pension payments from employer (other than exempted categories)
(c) Gratuity
Taxable after applying the exemption limits under Section 19
(d) Fees or Commission
Sales commission, professional fees paid by employer
(e) Perquisites
Benefits in kind — rent-free accommodation, car, ESOP etc. — as per Section 17
(f) Profits in Lieu of Salary
Compensation on termination, joining bonus, ex-gratia — as per Section 18
(g) Advance of Salary
Salary paid in advance for future months
(h) Leave Encashment
Payment for leave not availed — partly exempt (see Section 19)
(k) NPS Employer Contribution
Employer's NPS contribution — included as salary, but exempt under Section 19 up to limits
Section 16(k) — Employer's NPS Contribution: The employer's contribution to an employee's NPS account (notified pension scheme under Section 124) is included in the definition of "salary" — making it initially taxable. However, it is then deducted under Section 19 read with Section 29(b) as employer NPS contribution up to 14% of salary.
Section 17 — Perquisites
Replaces Section 17(2) of the 1961 Act. "Perquisite" covers all benefits and amenities received from an employer beyond monetary salary.
Taxable Perquisites [Section 17(1)]
| Clause | Perquisite | Valuation / Notes |
|---|---|---|
| (a) | Rent-free accommodation | Valued as prescribed in Rules — 7.5%/10%/15% of salary depending on city population, or actual lease rent, whichever is lower |
| (b) | Concessional accommodation — excess of FMV over rent charged | Prescribed value minus rent recovered from employee |
| (c) | Benefits/amenities to directors and employees with substantial interest in the company; and to specified employees (salary > prescribed limit) | Value of any free/concessional benefit — car, club membership, gas, electricity etc. |
| (d) | ESOPs / Sweat equity shares — allotted free or at concessional price | FMV on date of exercise minus amount actually paid by employee |
| (f) | Employer pays employee's personal obligation — income tax, loan repayment, insurance premium etc. | Full amount paid by employer |
| (g) | Life insurance premium paid by employer (other than approved PF/superannuation/deposit-linked fund) | Full premium amount is a taxable perquisite |
| (h) & (i) | Employer PF/NPS/superannuation contributions exceeding ₹7,50,000 per year (aggregate of all three) | Excess over ₹7.5L is taxable. Additionally, interest/accretion on the excess contribution is also taxable as perquisite. |
Perquisites Exempt from Tax [Section 17(2)]
- Medical treatment in employer-maintained hospital
- Employer pays for medical treatment at Government/approved hospitals
- Employer pays employee's health insurance premium (Section 30(c) approved scheme)
- Employer reimburses employee's own health insurance premium (Section 126 scheme)
- Transport from residence to office and back (commute)
- Medical treatment abroad — to extent permitted by RBI; travel abroad for medical treatment (if gross salary ≤ prescribed limit)
Section 18 — Profits in Lieu of Salary
Replaces Section 17(3) of the 1961 Act. Non-recurring, lump-sum, or irregular receipts connected with employment — taxable as if they were salary.
| Clause | What is included | Examples |
|---|---|---|
| (a) | Compensation for termination of employment or modification of terms | Ex-gratia on termination, notice pay in lieu |
| (b) | Any amount received before joining or after cessation of employment | Joining bonus, non-compete fees, deferred compensation |
| (c) | Any payment from employer/former employer or from provident fund (other than employee's own contributions + interest), or Keyman insurance proceeds | Withdrawal from unapproved superannuation fund; Keyman insurance received by employee |
Exclusions from profits in lieu [Section 18(2)]: Gratuity (Schedule II Sl. 3, 4, 5), commuted pension (Schedule II Sl. 7, 8, 9), retrenchment compensation (Schedule III Sl. 10, 11), and VRS receipts (Schedule III Sl. 12) are excluded from this definition — they are taxable as salary but have their own specific exemption limits under Section 19.
Section 19 — Deductions & Exemptions from Salary
Replaces Section 16 of the 1961 Act. The deduction table — amounts deducted from gross salary to arrive at taxable salary income.
| Sl. | Nature of Sum | Deduction / Exemption Amount |
|---|---|---|
| 1 | Professional tax (employment tax under Article 276(2) of Constitution) | Entire amount (maximum ₹2,500 per year) |
| 2 | Standard deduction | ₹75,000 under new tax regime (Section 202(1)); ₹50,000 under old regime — whichever is applicable, or actual salary, whichever is less |
| 3 | Death-cum-retirement gratuity (Central Govt / State Govt / All-India Services) | Entire amount |
| 4 | Retiring gratuity under Pension Code (Defence services) | Entire amount |
| 5 | Gratuity under Payment of Gratuity Act 1972 | Actual amount received, subject to limits under Section 4(2)/(3) of the PGA — max as notified by Central Govt |
| 6 | Any other gratuity (private sector, not under PGA) | Minimum of: (a) actual received; (b) Central Govt notified limit; (c) ½ month salary × completed years of service |
| 7–9 | Commuted pension — Govt/Govt-equivalent employees (Sl. 7); other employers (Sl. 8); from specified funds (Sl. 9) | Sl. 7: Entire amount. Sl. 8: 1/3rd (if also receives gratuity) or 1/2 (if no gratuity), of commuted value. Sl. 9: Entire amount. |
| 10–11 | Retrenchment compensation under Industrial Disputes Act or other law | Minimum of: (a) actual received; (b) Section 25F(b) of IDA amount; (c) notified amount (not less than ₹50,000). Sl. 11 (CG-approved scheme): entire amount. |
| 12 | VRS / Voluntary Separation Scheme — eligible companies and institutions | Minimum of: (a) actual received; (b) ₹5,00,000. Once claimed, no further VRS deduction in any year. |
| 13 | Leave encashment at retirement — Central/State Govt employees | Entire amount |
| 14 | Leave encashment at retirement — other (private sector) employees | Minimum of: (a) leave salary for earned leave (max 30 days/year of service); (b) 10 × average monthly salary of last 10 months; (c) notified limit; (d) actual received |
House Rent Allowance (HRA) — Schedule III, Sl. 11
HRA is an allowance specifically granted to meet rent expenditure for residential accommodation. Not available if employee lives in own house, or under the new tax regime (unless specifically preserved by rules).
HRA Exempt = Minimum of:
(a) Actual HRA received
(b) Rent paid − 10% of Salary
(c) 50% of Salary (if in Metro — Delhi, Mumbai, Kolkata, Chennai) OR 40% of Salary (other cities)
(a) Actual HRA received
(b) Rent paid − 10% of Salary
(c) 50% of Salary (if in Metro — Delhi, Mumbai, Kolkata, Chennai) OR 40% of Salary (other cities)
Key conditions for HRA exemption:
- Allowance must be specifically granted to meet actual rent expenditure
- Employee must actually pay rent — must not own the residence
- Rent receipts required; PAN of landlord required if annual rent > ₹1 lakh
- "Salary" for HRA purposes = Basic + Dearness Allowance (to the extent it forms part of retirement benefits) + Commission based on fixed % of turnover
- Excess HRA over exempted amount is fully taxable
Leave Travel Concession (LTA) — Schedule III, Sl. 8
Travel allowance/concession for the employee and family to travel anywhere in India on leave — or on retirement/termination.
Exempt amount = Actual travel cost (not more than the amount received as LTA). Subject to:
- Only travel within India — no foreign travel qualifies
- Only fare costs qualify — hotel, meals, local transport not covered
- Available for 2 journeys in a block of 4 calendar years (block determined by Central Govt)
- "Family" = spouse, children (max 2 children for journeys after 1 Oct 1998), parents, brothers and sisters who are wholly/mainly dependent
- Exemption is for travel of employee and family — proof of travel required
Gratuity — Section 19 Table (Sl. 3–6)
| Category of Employee | Exempt Amount | Notes |
|---|---|---|
| Govt employees (Central/State/All-India Services/Defence) | Entire amount | Death-cum-retirement gratuity / defence pension code gratuity — fully exempt |
| Private sector — covered by Payment of Gratuity Act 1972 | As per PGA limits (notified max currently ₹20L) | Restricted to amounts under Section 4(2)/(3) of PGA |
| Private sector — not covered by PGA | Minimum of: (a) actual; (b) notified limit; (c) ½ month avg salary × completed years | "Salary" here = Basic + DA (if forming part of retirement benefit) only |
Leave Encashment — Section 19 Table (Sl. 13–14)
Govt Employees (Sl. 13)
Leave encashment received at retirement from Central or State Govt — entire amount exempt.
Other Employees (Sl. 14)
Minimum of: (a) Earned leave salary (max 30 days per year of service); (b) 10 × average monthly salary of last 10 months; (c) Notified limit (currently ₹25L); (d) Actual received.
Salary = Basic + DA (where part of retirement benefit) + commission on fixed % of turnover.
VRS & Retrenchment Compensation — Section 19 Table (Sl. 10–12)
| Payment | Exempt Amount | Key Notes |
|---|---|---|
| Retrenchment compensation — IDA/other law/standing order | Minimum of: (a) actual; (b) Section 25F(b) IDA amount; (c) ≥₹50,000 as notified | IDA formula: 15 days' average pay per year of service |
| Retrenchment under CG-approved scheme (Sl. 11) | Entire amount | Applicable to undertakings under CG-approved protection schemes |
| VRS — public sector company, company, authority, co-operative society, University, IIT, Govt, notified institution | Minimum of: (a) actual; (b) ₹5,00,000 | One-time claim only — no further VRS deduction in any other year. Section 157 relief cannot be combined with this deduction. |
Computation of Income from Salaries
Basic Salary + DA + HRA (full) + Other Allowances
+ Perquisites (as valued)
+ Profits in lieu of salary
= GROSS SALARY
Less: HRA exemption (Schedule III, Sl. 11)
Less: LTA exemption (Schedule III, Sl. 8)
Less: Gratuity/commuted pension/retrenchment/VRS exemptions (Sec 19 table)
Less: Other Schedule II/III exempt amounts
= SALARY AFTER EXEMPTIONS
Less: Standard Deduction (₹75,000 new regime / ₹50,000 old regime) [Sec 19, Sl. 2]
Less: Professional Tax [Sec 19, Sl. 1]
= INCOME FROM SALARIES
+ Perquisites (as valued)
+ Profits in lieu of salary
= GROSS SALARY
Less: HRA exemption (Schedule III, Sl. 11)
Less: LTA exemption (Schedule III, Sl. 8)
Less: Gratuity/commuted pension/retrenchment/VRS exemptions (Sec 19 table)
Less: Other Schedule II/III exempt amounts
= SALARY AFTER EXEMPTIONS
Less: Standard Deduction (₹75,000 new regime / ₹50,000 old regime) [Sec 19, Sl. 2]
Less: Professional Tax [Sec 19, Sl. 1]
= INCOME FROM SALARIES
Practical Q&A
| Question | Answer |
|---|---|
| I receive HRA of ₹20,000/month, pay rent of ₹22,000/month, basic salary ₹40,000/month. I live in Mumbai. HRA exempt? | Minimum of: (a) ₹2,40,000; (b) ₹2,64,000 − 10% × ₹4,80,000 = ₹2,64,000 − ₹48,000 = ₹2,16,000; (c) 50% × ₹4,80,000 = ₹2,40,000. Exempt = ₹2,16,000. Taxable HRA = ₹24,000. |
| My employer contributes ₹5L to NPS, ₹2L to PF, and ₹2L to superannuation fund. What's taxable as perquisite? | Aggregate = ₹9L. Exempt = ₹7.5L. Taxable perquisite = ₹1.5L under Section 17(1)(h). |
| I received ₹30L as VRS payment. How much is exempt? | VRS exempt = minimum of (a) ₹30L and (b) ₹5L = ₹5L. Taxable = ₹25L. (Relief under Section 157 may also be available for the taxable portion if it creates a spike in income.) |
| I am a private sector employee and received ₹18L as gratuity on retirement (covered by PGA). What's taxable? | PGA limit (currently ₹20L notified). Since ₹18L < ₹20L, entire ₹18L is exempt. If gratuity had been ₹22L, only ₹2L excess would be taxable. |
| ESOP: I exercised options when share FMV was ₹800; exercise price was ₹200. 1,000 shares. Perquisite? | Perquisite = (₹800 − ₹200) × 1,000 = ₹6,00,000 — taxable in the year of exercise under Section 17(1)(d). TDS is deducted by employer. (Start-ups may defer TDS in instalments under Section 392.) |
| What is the standard deduction for a pensioner under the new tax regime? | ₹75,000 — Section 19(1)(Sl. 2)(a). Pensioners are treated on par with salaried employees for this purpose. Under the old regime: ₹50,000. |
📖 Related Topics
📌 Source: Income Tax Act 2025, Act No. 30 of 2025 — Section 15 (page 28), Section 16 (page 29), Section 17 (pages 30–31), Section 18 (page 32), Section 19 (pages 33–35), Schedule III Sl. 8 (LTA, page 622), Schedule III Sl. 11 (HRA, page 622), as published in the Gazette of India Extraordinary dated 21st August 2025. Use the Section Cross-Reference tool to map 1961 Act sections to 2025 Act equivalents.