income under salary

Meaning of Salary Income

Salary income = remuneration received from an employer for services rendered.

Includes:

Basic salary

Allowances

Perquisites

Retirement benefits

Objective → Determine taxable income under he

ad “Salaries”

Scope of Salary

Applicable to:

Employees of government or private sector

Directors receiving remuneration

Pensioners receiving pension

Income is taxable on accrual basis

Section 17(1) of Income Tax Act, 1961

Salary = wages, any annuity, pension, gratuity, fees, commission, perquisites, profit in lieu of salary

Profit in lieu of Salary (Sec 17(3))

Includes:

Compensation for termination

Amount received under voluntary retirement / retrenchment

Pre-commencement arrears / leave encashment

Example:

Employee retires, receives ₹5 lakh VRS → Fully taxable

under salary

Time of Taxation

Salary income is taxable on accrual basis

If paid in arrears / advance, taxed in year of receipt

Place of Taxation

Resident → Global income included (if salary outside India, may claim DTAA)

Non-resident → Only salary income received / deemed to be received in India

Example:

Non-resident works in India → Salary from India → Taxable

Salary earned abroad by resident → Taxable

in India

Types of Allowances

Fully taxable: Dearness allowance (if forming part of salary), City compensatory allowance

Fully exempt: Conveyance allowance (up to ₹1,600 p.m. for travel to office), Children education allowance

Partially exempt / House Rent Allowance (HRA):

Exempt amount = Least of:

1. Actual HRA received

2. Rent paid – 10% of salary

3. 50% of salary (metro) / 4

0% (non-metro)

Example:

Employee receives HRA ₹50,000, rent paid ₹30,000, basic + DA ₹35,000 → Exempt = min(50,000, 30,000–3,500=26,500, 50%×35,000=17,500) = ₹17,500 exempt

Defination of perquisites

Perquisite = benefit / amenity provided by employer in respect of employment

Examples: Rent-free accommodation, car, concessional loans, stock options

VValuation of Perquisites (Sec 17(2))

Rent-free accommodation: Based on salary / cost of accommodation

Concessional loans: Interest difference taxed

PF / Pension contributions by employer: Taxable above prescribed limits

Example:

Employer provides car for personal use → Taxable value = ₹X as per IT rules

Types of Retirement Benefits

Gratuity (Sec 10(10)) → Partially exempt

Pension → Fully taxable (except commuted for government employee)

Leave encashment → Exempt for government employees & partially for private employees

Provident Fund → Contribution by employer taxable above limits

Example:

Employee retires, receives leave encashment ₹2,50,000 → Exempt limit = ₹3,00,000 → Fully exempt

Deductions under Section 16

Standard Deduction

₹50,000 from salary income (FY 2025–26)

Entertainment allowances and Professional Tax

Only government employees → ₹5,000 or actual, whichever is less

And

Deductible from salary income

Computation of Salary Income

Formula:

Salary Income = Gross Salary – Exempt Allowances – Deductions under Sec 16 + Value of Perquisites + Profit in lieu of salary

Example Computation:

Basic = ₹3,00,000

DA = ₹1,00,000

HRA received = ₹1,50,000

Rent paid = ₹1,20,000

Standard deduction = ₹50,000

HRA exemption = min(HRA, Rent–10% salary, 50% basic+DA) = ₹50,000 → Salary taxable = Gross – exemptions – deductions

Advance Salary / Arrears

Salary received in advance → taxable in year of receipt

Arrears of salary → Section 89 may be applied to reduce tax burden

VRS / Termination Compensation

Fully taxable if received under voluntary retirement (except specified limits under Sec 10(10C))

Perquisites Scenario

Rent-free accommodation, concessional loans, stock options → Apply valuation rules as per IT Act

Retirement Benefits Scenario

Leave encashment, gratuity, PF → Apply exemption limits

Quick Tricks

Salary = Remuneration + Allowances + Perquisites + Retirement Benefits + Profit in lieu

HRA exemption = min(received, rent–10% salary, 50%/40% of salary)

Leave encashment & gratuity → Check exemption limits

Section 16 deductions → Standard ₹50,000, entertainment ₹5,000, professional tax

Arrears → Sec 89, Advance → taxable in year received