Section 15 of the Income Tax Act, 1961, plays a critical role in defining the taxation framework for salaried individuals in India. It establishes the basis for charging income tax on salary income, ensuring that individuals are taxed fairly based on their earnings. Whether you are a salaried employee, a taxpayer, or simply someone looking to understand how salary taxation works, this article will provide a comprehensive overview of Section 15 and its implications.
In this guide, we will break down the legal text of Section 15, explain its components, discuss its relevance to taxpayers, and provide practical examples to simplify the concept. Additionally, we will explore how Bajaj Finserv Home Loans can help salaried individuals maximise their financial planning, particularly in light of tax considerations.
Legal text of Section 15 – Bare Act language simplified
Official Legal Wording of Section 15
Section 15 of the Income Tax Act states:
"The following income shall be chargeable to income-tax under the head 'Salaries':
- Any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
- Any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, though not due or before it became due to him;
- Any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year."
Simplified Explanation with Examples
Clause 1: Income due but not paid
Salary that is due but remains unpaid is still taxable in the year it becomes due.
- Example: If your employer does not pay your March 2025 salary during FY 2024-25, it is still taxable for FY 2024-25.
Clause 2: Advance salary paid
Salary that is paid in advance is taxable in the year it is received, even if it is for a future period.
- Example: If you receive your June 2025 salary in May 2025, it will be taxed in FY 2025-26.
Clause 3: Arrears of salary
Salary arrears, or past dues paid in the current year, are taxable in the year they are received unless taxed earlier.
- Example: If a bonus for FY 2023-24 is paid in FY 2024-25, it will be taxed in FY 2024-25.
Income chargeable under Section 15
The following categories of income are chargeable to tax under Section 15:
Salary due from employer (even if not paid)
- Example: March 2025 salary due but unpaid is taxable in FY 2024-25.
Advance salary paid
- Example: June 2025 salary paid in May 2025 is taxable in FY 2025-26.
Arrears of salary received
- Example: A bonus for FY 2023-24 received in FY 2024-25 is taxable in FY 2024-25.
When is salary taxable under Section 15? Timing rules explained
The taxation of salary income under Section 15 is based on the "Due vs Receipt Basis". Salary is taxable in the year it is either:
- Due (whether or not it is paid), or
- Received (whether or not it was due earlier), whichever is earlier.
Scenarios to Illustrate Timing Rules
Salary due in March but paid in April
- Taxable in the year it was due (March).
Advance salary
- Taxable in the year it is received, even if it is for a future period.
Components of salary income covered under Section 15
Section 15 covers the following components of salary income:
- Basic Salary: The fixed component of your salary.
- Allowances: Includes House Rent Allowance (HRA), Dearness Allowance (DA), and Transport Allowance (TA).
- Bonus/Incentives: Performance-based or contractual bonuses.
- Gratuity: If taxable, it is included under salary income.
- Advance Salary: Any salary paid in advance.
- Salary Arrears: Past dues paid in the current year.
Note: Relief under Section 89
If you receive arrears or advance salary, you may be eligible for tax relief under Section 89 to mitigate the impact of higher taxation in a single year.
Exclusions – What is not covered under Section 15?
Not all income is taxable under Section 15. The following are excluded:
What is not covered:
- Pension income (in certain cases).
- Consultancy fees or professional income.
- Business income.
What is covered:
- Salary income from current or former employers.
Examples of Section 15 salary income – Case studies
Example 1: Bonus arrears
A bonus for FY 2023-24 is paid in FY 2024-25. It is taxable in FY 2024-25 unless taxed earlier.
Example 2: Advance salary
A teacher receives two months’ advance salary for FY 2025-26 in FY 2024-25. The advance salary is taxable in FY 2024-25.
Important case laws and CBDT clarifications on Section 15
Key Case Laws
Case Law Example #1:
- Name: XYZ vs. Income Tax Department
- Summary: Clarified the taxability of arrears received after retirement.
Case Law Example #2:
- Name: ABC vs. Income Tax Department
- Summary: Determined the tax treatment of advance salary payments.
CBDT Clarifications
The Central Board of Direct Taxes (CBDT) has issued circulars to clarify the treatment of arrears and advance salary under Section 15, ensuring uniform application of the law.
Link between Section 15 and Form 16 – What taxpayers should know
Form 16 is the most important document for salaried individuals. It summarises salary income and tax deductions.
- Part A: Details of tax deducted at source (TDS).
- Part B: Breakup of salary components and tax deductions.
Cross-verify your Form 16 with your taxable salary income under Section 15 to ensure accurate reporting in your Income Tax Return (ITR).
Common mistakes taxpayers make related to Section 15
Avoid these common errors when reporting salary income:
- Declaring income in the incorrect year.
- Confusing gross versus net salary.
- Ignoring arrears mentioned on Form 16.
- Not claiming tax relief under Section 89.
How to report salary income correctly in ITR
Follow these steps to report salary income accurately:
- Match data with Form 16.
- Cross-verify with AIS/TIS.
- Report advance salaries and arrears under the correct section.
Conclusion
Understanding Section 15 of the Income Tax Act is crucial for salaried individuals to ensure accurate tax reporting and compliance. Whether it is advance salary, arrears, or income due but unpaid, this section defines the taxability framework.
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