Tax Laws and Practice · Income under the Head Salary

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

Updated 11 October 2026 · Fact-checked

Under the Income-tax Act, 2025, salary is income from an employer-employee relationship. Section 16 lists what salary includes, such as wages, pension, gratuity, fees, commission and perquisites. Section 15 charges salary that is due, paid in advance, or arrears not taxed earlier, whichever applies. Check the relationship, the item, then the timing.

Understand Meaning of Salary and Basis of Charge

Salary is what an employee gets from an employer for service. The head "Salaries" applies only when there is an employer-employee relationship, a contract of service where the employer controls how and when work is done. If you work as an independent professional under a contract for services, your receipts are business or profession income, not salary. This is the key difference between salary and professional fees.

Section 16 gives an inclusive list of what "salary" covers: wages, any annuity or pension, any gratuity, any fees or commission, perquisites, profits in lieu of or in addition to salary, advance of salary, payment for leave not availed of, and certain provident fund and pension scheme items. Because the list says "includes", other payments from the employer for service can also be salary. Fees and commission paid to an employee by the employer are salary, even though they look like professional receipts.

Section 15(1) decides when salary is charged. Three limbs apply. First, salary due from an employer in the tax year is taxable whether paid or not. Second, salary paid or allowed in the tax year, though not due or before it became due, is taxable. Third, arrears of salary paid or allowed in the tax year are taxable if they were not charged to tax for any earlier tax year. So the basis is due or paid, whichever comes first, with arrears taxed only once.

Section 15(2) says "employer" includes a former employer. A pension or arrears received from a past employer is still salary. Section 15(3) prevents double tax: if salary paid in advance was included in total income, it is not included again when it becomes due. Section 15(4) says that salary, bonus, commission or remuneration due to or received by a partner from the firm is not salary. It is dealt with under business income.

Key rules to remember

Items included in salary: Section 16: wages, annuity or pension, gratuity, fees or commission, perquisites, profits in lieu of or in addition to salary, advance of salary, leave encashment for leave not availed, and the specified provident fund and pension scheme items; The list is inclusive. Learn the main items and the principle behind them.
Charge on due basis: Section 15(1)(a): salary due from an employer in the tax year, whether paid or not; Taxed in the tax year it falls due, even if unpaid.
Charge on paid in advance: Section 15(1)(b): salary paid or allowed in the tax year, though not due or before it became due; Advance salary is taxed in the year of receipt.
Charge on arrears: Section 15(1)(c): arrears paid or allowed in the tax year, if not charged to tax in any earlier tax year; Arrears are taxed once only.
Former employer: Section 15(2): employer includes former employer; Pension from a past employer is salary.
No double taxation: Section 15(3): advance salary already taxed is not taxed again when it becomes due; Applies to the same salary, not new salary.
Partner's remuneration: Section 15(4): salary, bonus, commission or remuneration from a firm to a partner is not salary; No employer-employee relationship between firm and partner for this purpose.
TDS on salary: Section 392(1): deduct tax at the time of payment at the average rate on estimated salary income for the tax year; The payer of salary is responsible for deduction.

How to solve Meaning of Salary and Basis of Charge questions

Use this order for any question on the meaning or charge of salary.

1Identify the payer and the receiver. Ask if there is an employer-employee relationship (contract of service, control, regular pay).
2If the receiver is a partner of a firm, apply section 15(4) and exclude the remuneration from salary.
3If the receiver is an independent professional or contractor, classify the receipt as business or profession income, not salary.
4Match each receipt to the items in section 16, such as wages, pension, gratuity, fees, commission, perquisites or advance salary.
5Apply section 15(1): decide whether salary is taxable as due, as paid in advance, or as arrears not taxed earlier.
6Check section 15(2) and (3): treat a former employer as an employer and avoid double inclusion of advance salary.
7State the tax year in which each amount is charged and give a clear conclusion, citing the section.

Quickest way: Three-question check

When to use it: Use when time is short and the question asks whether an amount is salary or in which year it is taxed.

Question 1: Is the payer an employer (including former employer) and the receiver an employee, not a partner or contractor? If no, it is not salary.
Question 2: Is the item in the section 16 list or clearly paid for service? If yes, it is salary.
Question 3: Was it due, or paid, in this tax year, and was it taxed earlier? Tax it in the earlier of due or paid, and never twice.

Common mistakes in Meaning of Salary and Basis of Charge

Treating a partner's salary or commission from the firm as salary income.
The word "salary" appears in the partnership deed, so students assume the head applies.
Fix: Apply section 15(4). It is not salary. It is taxed under business or profession as the law provides.
Taxing salary only when it is received.
Students link tax with cash receipt, as in some other heads.
Fix: Salary due in the tax year is taxable whether paid or not. Also tax it if paid in advance.
Taxing advance salary again in the year it falls due.
Students forget the rule against double inclusion.
Fix: Under section 15(3), if advance salary was included in total income, do not include it again when due.
Calling a consultant's fee salary because the payer is a company.
The payer is a company, so students assume employment.
Fix: Test the relationship. If it is a contract for services without control, it is professional fees.
Ignoring pension or arrears from a former employer.
Students think salary needs a current job.
Fix: Section 15(2) includes a former employer. Pension is listed in section 16, and arrears are taxed if not taxed earlier.
Taxing arrears again that were already charged in an earlier year.
Students tax every arrear on receipt.
Fix: Section 15(1)(c) charges arrears only if not charged to tax for any earlier tax year.

Worked examples

Example 1

Rohan is a manager at Sundaram Ltd, a company in Chennai. His salary for March of the tax year is ₹80,000, due on 31 March but paid on 5 April, which falls in the next tax year. Is it taxable in the current tax year? Also, Sundaram Ltd pays his colleague Meera, a partner in a separate firm she runs, ₹30,000 as a one-time consulting fee under a contract for services. How are they treated?

Show the solution

Provision: Section 15(1)(a) charges salary due from an employer in the tax year, whether paid or not.
Rohan: The March salary was due on 31 March, which is within the tax year. Payment in April does not matter.
Rohan's relationship with Sundaram Ltd is a contract of service, so the head "Salaries" applies.
Meera: She is not an employee. The fee is under a contract for services, so there is no employer-employee relationship.
Meera's fee is therefore professional receipt, taxed under business or profession, not salary.

Answer: Rohan's ₹80,000 is taxable as salary in the current tax year under section 15(1)(a), as it was due in that year. Meera's ₹30,000 is not salary. It is income from profession.

Example 2

Anita works for Kaveri Textiles Ltd. In the tax year she receives her regular salary and, in the same year, ₹60,000 as salary paid in advance for the first two months of the next tax year. In the next tax year, the salary becomes due. How is the ₹60,000 taxed?

Show the solution

Provision: Section 15(1)(b) charges salary paid or allowed in the tax year though not due or before it became due.
In the tax year of receipt, the ₹60,000 is paid before it is due, so it is included in her salary income.
Section 15(3) says that advance salary included in total income is not included again when it becomes due.
In the next tax year, when the salary falls due, the same ₹60,000 is not taxed again.

Answer: The ₹60,000 is taxable as salary in the year Anita receives it, under section 15(1)(b). It is not taxed again in the next tax year because of section 15(3).

Exam tips

Write the section number for each limb of section 15(1). Examiners look for the provision first, then the facts.
For a question on salary versus professional fees, state the test of employer-employee relationship before concluding.
Remember that section 15(4) excludes partner remuneration from salary. This is a frequent short-note point.
Do not forget TDS. Mention section 392(1): the payer deducts tax at the average rate when paying salary.
End every answer with a one-line conclusion naming the tax year and the head of income.

Practice questions from Income under the Head Salary

Meaning of Salary and Basis of Charge in other exams

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

Meaning of Salary and Basis of Charge: frequently asked questions

Is salary taxed when due or when received?

It is taxed on whichever applies under section 15(1). Salary due in the tax year is taxable whether paid or not. Salary paid in advance is taxable when paid. Arrears are taxable when paid if not taxed earlier.

What is the difference between salary and professional fees?

Salary comes from a contract of service, where there is an employer-employee relationship. Professional fees come from a contract for services by an independent person. Salary is taxed under the head Salaries, and professional fees under business or profession.

Is a partner's remuneration from the firm salary?

No. Under section 15(4), salary, bonus, commission or remuneration due to or received by a partner from the firm is not regarded as salary.

Does pension from a former employer count as salary?

Yes. Section 16 lists any annuity or pension in salary, and section 15(2) states that employer includes former employer.