PROSPERR.IO

The Income-Tax Act, 2025 has come into effect from 01 April 2026 and is applicable for income earned during the Financial Year 2026–27 (Tax Year: 01/04/2026 to 31/03/2027). Accordingly, all salary income, whether earned, accrued, or received during this period, needs to be evaluated under Sections 15 to 19 of the Income-Tax Act, 2025.

Section-wise Overview

Taxation of salary income forms the backbone of personal taxation. The law not only defines what constitutes salary income but also governs the timing of taxation, scope of inclusions, valuation of perquisites, and deductions from salary. It is also important to distinguish between Cost to Company (CTC) and taxable salary, as not all components of CTC are fully taxable.

This article provides a practical guide to salary taxation under the Income-Tax Act, 2025 with illustrations

Basis of Charge (Section 15)

Section 15 of the Income-Tax Act, 2025 governs the timing of taxation of salary income, ensuring taxation on accrual or receipt basis, whichever is earlier.

• Section 15(1)(a): “any salary due… whether paid or not."
• Section 15(1)(b): “any salary paid… though not due”
• Section 15(1)(c): “any arrears of salary… if not taxed earlier”

Key Principles

• Salary is taxable on due or receipt basis, whichever is earlier
• Double taxation is avoided [Section 15(3)]
• "Employer" includes former employer [Section 15(2)]

Practical Examples (FY 2026–27)

• Salary due for March 2027 paid in April 2027 → Taxable in FY 2026–27
• Advance salary received in March 2027 → Taxable on receipt in FY 2026–27
• Arrears received during FY 2026–27 → Taxable in FY 2026–27

Timing of Taxation: Overview

Meaning of Salary (Section 16)

Section 16 of the Income-Tax Act, 2025 provides a broad and inclusive definition of salary, covering all forms of employee compensation.

Key Components of Salary

• Basic salary, DA, HRA
• Allowances (taxable/exempt)
• Wages, pension, annuity, gratuity
• Commission and fees
• Perquisites
• Profits in lieu of salary or in addition to salary
• Leave encashment
• Employer contributions to NPS,
• Taxable component of annual accretion to Recognised Provident Fund (RPF), superannuation fund

Interpretation

The term “includes” makes the definition wide and non-exhaustive, ensuring all employment-related receipts are covered under income from salary.

Meaning of Perquisites (Section 17)

"Perquisites taxation in India” refers to benefits or amenities provided by the employer. These significantly impact salary income tax calculation.

Categories of Perquisites

The value of certain perqusites is determined as per the valuation method prescribed under the Income-Tax Rules, 2026

(A) Taxable Perquisites [Section 17(1)]

• Rent-free or concessional accommodation
• Benefits or amenities provided by the employer”
• Value of ESOPs granted free of cost or at concessional rates
• Vehicles, gadgets or other movable assets provided for personal use
• Employer paying personal expenses
• Employer contributions in Recongnised Provident Fund, National Pension Scheme and approved superannuation fund exceeding ₹750,000 and accretions on excess contributions computed in the prescribed manner.

(B) Exempt Perquisites [Section 17(2)]

• Medical treatment in prescribed/approved hospitals is subject to fulfillment of prescribed conditions.
• Health insurance premiums
• Conveyance between residence and workplace

(C) Tax-Free Perquisites (Rules), such as-

• Meal coupons (up to ₹200 per meal)
• Gifts up to ₹15,000 per year

Perquisites Taxability Matrix

Professional Insight

Accurate valuation of perquisites is essential for correct TDS compliance and avoiding under-reporting of taxable salary.

Meaning of Profits in Lieu of Salary (Section 18)

This section covers indirect compensation arising from employment.

Coverage

• Termination compensation
• Compensation for change in term of employment
• Joining bonus
• Payments after cessation
• Employer-funded payments [certain payments excluded as per section 18(2)]

Overview

Deductions from Salary (Section 19)

After computing gross salary, deductions are allowed to determine taxable salary income.

Major Deductions

• Standard deduction: ₹50,000 in the Old Tax Regime and ₹75,000 in the New Tax Regime
• Professional tax
• Gratuity, Pension commutation, Leave encashment and VRS compensation—Subject to limits, applicable computation formula and conditions

Deductions Summary

Compliance Note

Many deductions are subject to lifetime limits and aggregation rules, critical for income tax salary deductions in India.

Salary Income Computation Flow

FAQs

I. How is salary income taxed under the Income-Tax Act, 2025?

Salary income is taxed under Sections 15 to 19 of the Income-Tax Act, 2025. It is taxable on due or receipt basis, whichever is earlier, and includes basic salary, allowances, perquisites, and profits in lieu of salary, after allowing eligible deductions from salary.

II. What is included in salary under the Income-Tax Act, 2025?

The term "salary income" includes:

• Basic salary, dearness allowance (DA), HRA
• Wages, pension, and gratuity
• Commission and fees
• Perquisites
• Profits in lieu of salary
• Leave encashment
• Employer contributions to NPS, PF, and superannuation funds (subject to limits)
  

III. What are perquisites and how are they taxed in India?

Perquisites taxation in India refers to taxation of amenities or benefits provided by an employer free of cost or at concessional rates, such as-

• Rent-free accommodation
• ESOPs
• Personal use of employee provided car

These are taxable based on prescribed valuation rules, except for certain exempt perquisites like medical facilities and health insurance.

IV. What is the standard deduction for salary FY 2026–27?

For FY 2026–27, the standard deduction available from salary income is:

• ₹75,000 under the new tax regime
• ₹50,000 in other cases

This deduction reduces taxable salary income directly.

V. What is the difference between CTC and taxable salary?

Cost to Company (CTC) includes all benefits provided by the employer, whereas taxable salary includes only those components that are taxable under the Income-Tax Act after considering exemptions and deductions.
👉 Not all components of CTC are fully taxable.

VI. Are arrears and advance salary taxable?

Yes, under Section 15:

• Advance salary is taxable on receipt
• Arrears of salary are taxable when received
• Salary is taxed on earlier of due or receipt basis

VII. How are deductions from salary calculated?

Deductions from salary are primarily allowed under Section 19 and include items such as the standard deduction, professional tax, and certain retirement-related benefits (like gratuity, leave encashment, and pension commutation), subject to prescribed limits and conditions.

In addition, depending on the tax regime opted, other benefits may also be available under the Act. These may include exemptions such as HRA and LTA under section-11, and deductions for items like health insurance premiums (Section 126) and eligible investments and payments (Section 123), contributions in National Pension Scheme (NPS) (Section 124), higher education loan interest (Section 129) subject to applicable conditions.

VIII. What are profits in lieu of salary?

Profits in lieu of salary include compensation or payments received:

• On termination of employment
• Before joining or after leaving a job
• From employer-funded schemes

These are fully taxable under Section 18.

IX. How is salary income calculated step-by-step?

Salary income tax calculation involves:

1. Compute gross salary (basic + allowances + perquisites)
2. Add profits in lieu of salary
3. Deduct standard deduction and other eligible deductions under section 19
4. Arrive at taxable salary income
5. Include the taxable salary income in Gross Total Income
6. Deduct- deductions

X. What are the key sections governing salary taxation in India?

The main provisions for salary taxation FY 2026–27 are:

• Section 15 – Basis of charge
• Section 16 – Meaning of salary
• Section 17 – Perquisites
• Section 18 – Profits in lieu of salary
• Section 19 – Deductions from salary

Conclusion

The provisions relating to taxation of salary under the Income-Tax Act, 2025 provide a clear framework for salary income computation for FY 2026–27. They ensure that all salary components are properly taxed, timing differences are addressed, perquisites and indirect benefits are included, and relevant deductions are allowed.

This article gives a practical overview of the key provisions. However, for a complete understanding, these sections should be read along with the relevant rules, circulars, notifications, and judicial decisions. Considering all these aspects together helps in making the right tax decisions and ensures proper compliance.

Salary taxation under the Income-Tax Act, 2025 is not just about sections. It’s about correctly interpreting rules, benefits, and timing to arrive at the right tax outcome. Book a free tax assessment call today!

Disclaimer

This article is intended for informational and educational purposes only and provides a general overview of the provisions relating to taxation of salary under the Income-Tax Act, 2025 applicable for FY 2026–27. The content is not intended to be a substitute for professional advice.

Tax laws are subject to amendments, interpretations, and judicial pronouncements, and their application may vary based on specific facts and circumstances. Readers are advised to refer to the relevant provisions of the Act, rules, circulars, and notifications and/or consult a qualified tax professional before making any decisions.

The author shall not be held responsible for any loss or consequences arising from reliance on this information.