Income from Salaries - Sections 15 to 19 | Allowances, Perquisites & Deductions

Key Takeaways

• Salary is taxable on due or receipt basis, whichever is earlier under Section 15 of the Income Tax Act, 2025.
• Section 17(1) (Income Tax Act, 2025) defines salary broadly to include wages, annuity, pension, advance of salary, gratuity, commission, and fees.
• Perquisites under Section 17(2) are valued as per prescribed rules under Income Tax Rules, 2026 and added to taxable salary.
• Standard deduction of Rs. 75,000 (new regime) or Rs. 50,000 (old regime) is available under Section 19 (previously Section 16(ia)).
• Employer's contribution to NPS up to 14% of salary (Central Govt) or 10% (others) is exempt under Section 124 (previously Section 80CCD(2)).

What Constitutes Salary? (Section 17(1) of the Income Tax Act, 2025)

Salary under the Income Tax Act, 2025 is much broader than common understanding. It includes:

• Wages - basic pay, overtime pay
• Annuity or pension - received from employer or former employer
• Gratuity - taxable portion after exemption under Schedule II
• Advance of salary - taxable in the year of receipt
• Leave encashment - taxable portion after Schedule II exemption
• Commission, fees, bonus - any form of compensation
• Contribution to RPF in excess of prescribed limits
• Interest on RPF exceeding prescribed rate

Note: Salary from a partnership firm to a partner is NOT taxable under this head - it is assessed under "Profits and Gains of Business or Profession."

Allowances - Taxable, Partially Exempt, and Fully Exempt

Fully Taxable Allowances

Dearness Allowance (if not part of basic for retirement benefits), City Compensatory Allowance, Tiffin/Lunch Allowance, Servant Allowance, Overtime Allowance.

Partially Exempt Allowances (Old Regime Only)

| Allowance | Exemption | |-----------|-----------| | House Rent Allowance | As per Schedule II / Rule 2A of Income Tax Rules, 2026 | | Leave Travel Allowance | Actual travel expenses, 2 journeys per block | | Children Education Allowance | Rs. 100/month per child (max 2) | | Hostel Expenditure Allowance | Rs. 300/month per child (max 2) | | Transport Allowance (disabled) | Rs. 3,200/month for specified disabled persons |

Fully Exempt Allowances

Foreign allowance to government employees posted abroad, allowances to judges of SC/HC, and UN employees' allowances.

Perquisites - Section 17(2) of the Income Tax Act, 2025

Perquisites are benefits or amenities provided by the employer. Valuation rules are prescribed under the Income Tax Rules, 2026 (Rule 3):

| Perquisite | Valuation Rule | |-----------|---------------| | Rent-free accommodation (Govt) | Licence fee as per government rules | | Rent-free accommodation (Others) | 15% of salary (population > 25 lakh), 10% (10-25 lakh), 7.5% (others) | | Motor car (employer-owned, personal use) | Rs. 1,800/month (up to 1.6L cc) or Rs. 2,400/month (above 1.6L cc) plus driver Rs. 900/month | | Interest-free loan | Interest at SBI lending rate on maximum outstanding balance exceeding Rs. 20,000 | | ESOP/Sweat equity | FMV on date of exercise minus amount paid by employee |

Specified employees (director, or employee with salary > Rs. 50,000 and holding 20%+ equity) are taxable on all perquisites. For other employees, only obligations-of-employee type perquisites are taxable.

Deductions from Salary - Section 19 of the Income Tax Act, 2025 (previously Section 16)

| Deduction | Old Regime | New Regime | |-----------|-----------|------------| | Standard Deduction - Sec 19(ia) | Rs. 50,000 | Rs. 75,000 | | Entertainment Allowance - Sec 19(ii) | Govt employees only (least of: allowance, 20% of salary, Rs. 5,000) | Not available | | Professional Tax - Sec 19(iii) | Actual paid (max Rs. 2,500) | Actual paid (max Rs. 2,500) |

Landmark Judgement

Worked Example - Salary Income Computation

Mr. Rajesh, employed with a private company in Delhi, has the following salary structure for Tax Year 2025-26:

| Component | Annual Amount (Rs.) | |-----------|-------------------| | Basic Salary | 9,00,000 | | DA (part of retirement benefits) | 1,80,000 | | HRA | 4,50,000 | | Special Allowance | 1,20,000 | | Employer's PF Contribution (12%) | 1,29,600 | | Employer's NPS Contribution (10%) | 1,08,000 | | Rent paid in Delhi | 25,000/month | | Professional tax paid | 2,500 |

Computation under Old Regime:

| Particulars | Amount (Rs.) | |------------|-------------| | Basic + DA + HRA + Special Allowance | 16,50,000 | | Less: HRA Exempt [Least of: 4,50,000 / (3,00,000 - 1,08,000)=1,92,000 / 50% of 10,80,000=5,40,000] | (1,92,000) | | Employer's PF (excess over 12% not applicable here) | - | | Gross Salary | 14,58,000 | | Less: Standard Deduction u/s 19(ia) | (50,000) | | Less: Professional Tax u/s 19(iii) | (2,500) | | Income from Salaries (Old Regime) | 14,05,500 |

Under New Regime: HRA exemption not available, but standard deduction is Rs. 75,000. Income from Salaries = 16,50,000 - 75,000 - 2,500 = Rs. 15,72,500.

In this case, the old regime is more beneficial due to HRA exemption.

Expert Tip

Section Interconnect

• Also read: Chapter 2 - Exempt Incomes under Section 11 + Schedule II (exemptions for HRA, gratuity, leave encashment reduce taxable salary)
• Also read: Chapter 9 - Deductions under Chapter VIII (Sections 122 to 154) (employee PF, NPS contributions qualify for deductions)
• Also read: Chapter 10 - TDS, TCS & Advance Tax (employer deducts TDS on salary under Section 392 of the Income Tax Act, 2025)

Frequently Asked Questions

Q1: Is notice period pay (recovered by employer) deductible from salary income?

Yes. If your employer recovers notice period salary from your full and final settlement, only the net amount received is taxable. If a new employer reimburses the notice period buyout, that reimbursement is taxable as salary from the new employer. Retain the pay slips and settlement statement as evidence.

Q2: Are tips received by hotel staff taxable as salary?

If tips are received through the employer (pooled tips distributed by management), they are taxable as salary income. If tips are received directly from customers without employer involvement, they are taxable as "Income from Other Sources." The characterisation depends on the route of receipt.

Q3: Can I claim both HRA exemption and home loan deduction simultaneously?

Yes, if you own a house in one city (and claim home loan interest under Section 22 and principal under Section 123 + Schedule XV) while renting in another city due to employment, you can claim both benefits. The conditions are that you should not be residing in your own house and should have a genuine need to live in a rented accommodation at the place of employment.

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