Taxation · Salaries

Basis of Charge and Meaning of Salary (Income-tax Act, 2025)

Updated 5 October 2026 · Fact-checked

Salary is remuneration an employee receives or is entitled to from an employer under an employer-employee relationship. It is taxed in the tax year in which it is due or received, whichever is earlier, and only once. To solve questions, test the relationship, list each payment, fix its due date, and tax it once.

Understand Basis of Charge and Meaning of Salary

Salary income starts with one question: is there an employer-employee relationship? This means a contract of service, where the employer can direct how and when you work. A contract for service, such as an independent professional with a client, is not employment. Payments there are business or profession income, not salary. A partner's remuneration from the firm and an owner's own drawings are also not salary, because you cannot be your own employer.

If the relationship exists, almost every payment that comes from it is salary. This includes wages, pension, annuity, gratuity, fees, commission, bonus, leave encashment, perquisites, allowances and profits in lieu of salary. The label does not decide it. The source (the employment) decides it. It does not matter whether the payment is called a gift, honorarium or a voluntary payment. It also does not matter whether it comes from a present or a former employer.

Next, the timing. For the head Salaries, salary is charged on a due or receipt basis, whichever is earlier. This is a rule for salary. Do not apply it as a general rule to other heads of income. If salary falls due in a tax year, it is taxed in that year even if you are paid later. If you receive it before it is due (advance salary), it is taxed when received. The key safeguard: the same salary is never taxed twice. Once taxed on the due basis, it is not taxed again when it is received. Once taxed as advance, it is not taxed again when it falls due.

Two terms cause the most confusion. Advance salary is salary paid before it is due. It is a part of your pay, so it is taxed in the year of receipt. A loan or advance against salary is only a loan that you must repay, so it is not taxed. Arrears of salary is salary relating to an earlier period that was not taxed earlier. It is taxed in the year you receive it. Relief for arrears or advance salary is available under the Act and the rules, but only if the prescribed conditions are met, for example where bunching of income raises your tax. It does not apply in every case, and the tax regime you choose can affect it. You claim relief in the prescribed way.

Finally, salary payable for service rendered in India is deemed to accrue or arise in India, even if it is paid outside India and even if it is received outside India. This links to residential status and scope of total income. For this topic, always work with the tax year: salary is charged for the tax year in which it is due or received, not for the year in which the work was done.

Key rules to remember

Condition for salary: Salary exists only if there is an employer-employee relationship (contract of service); Partner's remuneration, an owner's drawings and fees of an independent professional are not salary.
Basis of charge: Taxed in the tax year in which salary is DUE or RECEIVED, whichever is EARLIER; This rule applies to the head Salaries. Whichever event happens first fixes the year. Taxed only once.
Advance salary: Taxed in the year of receipt; not taxed again when it falls due; Do not confuse it with a loan against salary, which is not income.
Arrears of salary: Taxed in the year of receipt if not taxed earlier on due basis; Relief for arrears or advance salary is available under the Act and the rules only if the prescribed conditions are met. It does not apply in every case, and the tax regime can affect it.
Former and present employer: Salary due from a present or former employer is chargeable under the head Salaries; Pension received from a former employer is also salary. Family pension is income from other sources, where a deduction of the lower of one-third of the pension or the prescribed limit is allowed. The prescribed limit depends on the tax regime, so use the limit given in the question. If the question gives no limit, state the regime you assume and the limit under the Income-tax Act, 2025 as amended by the Finance Act, 2026.
Salary earned in India: Salary payable for service rendered in India is deemed to accrue or arise in India; This applies even if it is paid or received outside India.
Tax-year working: Taxable salary of the year = salary due in the year + arrears and advance salary received in the year (not taxed before); Subtract anything already taxed in another year.

How to solve Basis of Charge and Meaning of Salary questions

Use this order for any question on the basis of charge or meaning of salary. It stops you from taxing the wrong item or taxing an item twice.

1Check the relationship. Is the payer an employer and the receiver an employee? If it is a partner, a proprietor or a professional, move it out of salary.
2List every payment from the employer with its nature: basic pay, allowance, bonus, pension, arrears, advance, loan and so on.
3Remove items that are not salary or not income, such as loans repayable to the employer and reimbursements of actual expenses where the question says so.
4For each item, fix the date it fell due and the date it was received.
5Apply the rule: taxable in the earlier of the two years. Note the tax year of the question, which runs from 1 April to 31 March.
6Check whether the item was already taxed in an earlier year (for example, arrears for a period already taxed on due basis). If yes, exclude it.
7Add up the items taxable in the tax year asked. Show each amount in a separate line.
8State a one-line reason for each exclusion and mention relief for arrears or advance salary if the question asks for it.

Quickest way: Due-or-Receipt Table in 60 seconds

When to use it: Use it for MCQs and for written answers with many payments in different years.

Draw three columns: Item, Due year, Received year. Write the earlier year next to each item.
For MCQs, eliminate options that tax the same amount twice or that tax a loan against salary.
Eliminate options that treat partner remuneration or professional fees as salary.
For written answers, put each item on its own line with a short reason, such as 'due on 31 March 2027, so taxable in 2026-27'. Step marks come from the reason as well as the figure.
End with the total and a note on items excluded, with the reason.

Common mistakes in Basis of Charge and Meaning of Salary

Taxing salary only when it is received
Students think income is taxed when cash comes in.
Fix: Salary is taxed on the earlier of due or receipt. Salary for March paid in April is taxed in the March year.
Taxing the same salary again when it falls due or is received
Students tax advance salary in both years.
Fix: Tax it once, in the earlier year. Write 'already taxed' next to the later entry and exclude it.
Treating a loan or advance against salary as advance salary
The word 'advance' appears in both.
Fix: If the amount must be repaid and is not adjusted against future pay as income, it is a loan and is not taxed.
Treating a partner's salary or a proprietor's drawings as salary
The word 'salary' is used in the question.
Fix: Test the relationship first. Without an employer-employee relationship, the amount is business income or not salary at all.
Treating family pension as salary
Students link all pension to salary.
Fix: Pension received by the employee is salary. Family pension received by the legal heir is income from other sources. A deduction of the lower of one-third of the pension or the prescribed limit is allowed from it. The limit depends on the tax regime, so use the limit given in the question. If none is given, state the regime you assume and the limit under the Income-tax Act, 2025 as amended by the Finance Act, 2026.
Using the previous year of work instead of the tax year of the question
Students match salary to the year in which work was done.
Fix: Always place each item in the tax year in which it was due or received, as the earlier event requires.

Worked examples

Example 1

Meera is an employee. Her salary is ₹60,000 per month, paid on the last day of each month. Salary for March 2026 of ₹60,000 was paid on 5 April 2026 after a delay. In February 2027 she received ₹1,80,000 as advance salary for April to June 2027. In December 2026 she received ₹40,000 as arrears for 2025-26 under a revised pay scale, which had not been taxed earlier. Salary for March 2027 was paid on 5 April 2027. Compute the salary taxable in the tax year 2026-27 (before exemptions and deductions).

Show the solution

Salary for March 2026 (₹60,000) fell due on 31 March 2026. It is taxed in tax year 2025-26. Receipt on 5 April 2026 does not change that. Exclude it from 2026-27.
Regular salary for April 2026 to March 2027 is due in the tax year. The March 2027 salary was due on 31 March 2027, so the late payment does not matter. Taxable: ₹60,000 × 12 = ₹7,20,000.
Advance salary of ₹1,80,000 was received in February 2027, earlier than its due date in 2027-28. It is taxed in 2026-27. It will not be taxed again in 2027-28.
Arrears of ₹40,000 received in December 2026 were not taxed earlier. They are taxed in 2026-27.
Total = ₹7,20,000 + ₹1,80,000 + ₹40,000 = ₹9,40,000.

Answer: Salary taxable for tax year 2026-27 is ₹9,40,000 (before exemptions and deductions). Relief for the arrears or advance salary may be claimed only if the prescribed conditions are met.

Example 2

Decide whether each receipt is salary: (a) Pension of ₹20,000 per month received for 12 months by Mr Rao from his former employer. (b) Family pension of ₹15,000 per month received for 12 months by Mrs Rao after his death. (c) Remuneration of ₹5,00,000 received by Mr Shah as a partner of a firm. Give the amount taxable under the head Salaries. For (b), the limit for the family pension deduction depends on the tax regime; assume it is ₹25,000, as stated in this question.

Show the solution

(a) Pension from a former employer arises from the earlier employer-employee relationship. It is salary. Amount: ₹20,000 × 12 = ₹2,40,000.
(b) Family pension is received by the legal heir, who was never an employee. It is not salary. It is taxed as income from other sources. Gross family pension: ₹15,000 × 12 = ₹1,80,000. Deduction is the lower of one-third of the pension (₹60,000) or the prescribed limit of ₹25,000 given in the question, so ₹25,000. Taxable: ₹1,80,000 − ₹25,000 = ₹1,55,000, which is not under Salaries.
(c) A partner is not an employee of the firm. The remuneration is not salary. It is business income of the partner, subject to the firm's allowed deduction rules.
Total under the head Salaries = ₹2,40,000 only.

Answer: Taxable under Salaries: ₹2,40,000 (item a only). Item (b) is gross family pension of ₹1,80,000, which gives ₹1,55,000 taxable as income from other sources after the ₹25,000 deduction (the limit assumed in the question; the limit depends on the regime). Item (c) of ₹5,00,000 is business income.

Exam tips

In theory questions, begin with the employer-employee relationship. A one-line test earns marks even if the later working is weak.
In MCQs, look for the trap words: 'advance', 'arrears', 'former employer' and 'partner'. Each points to a specific rule.
Write the tax year clearly in every working note. For example: 'Due 31.03.2027, taxable in 2026-27'.
Keep a line for items excluded because they were already taxed. Examiners reward this reasoning.
Use only the Income-tax Act, 2025 terms: 'tax year', not 'assessment year'.

Practice questions from Salaries

Basis of Charge and Meaning of Salary in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Basis of Charge and Meaning of Salary: frequently asked questions

What is salary under the Income-tax Act, 2025?

Salary is remuneration, in any form, that an employee receives or is entitled to from an employer. It covers wages, pension, bonus, commission, perquisites and similar items. The test is the employer-employee relationship, not the name of the payment.

Is salary taxed on due basis or receipt basis?

For the head Salaries, it is taxed on whichever happens first. If salary falls due in a tax year, it is taxed in that year even if it is paid later. If it is received before the due date, it is taxed when received. The same amount is never taxed twice.

What is the difference between advance salary and arrears of salary?

Advance salary is paid before it is due and is taxed in the year of receipt. Arrears of salary is pay for an earlier period that was not taxed before and is taxed in the year you receive it. Relief for arrears or advance salary is available under the Act and the rules only if the prescribed conditions are met, and it does not apply in every case.

Is a loan from my employer taxable as advance salary?

No. A loan or advance against salary that you must repay is not income, so it is not taxed as salary. Only pay received before its due date counts as advance salary.

Is a partner's remuneration treated as salary?

No. A partner is not an employee of the firm, so there is no employer-employee relationship. The remuneration is taxed as business income of the partner.