CA Intermediate · Taxation

Salaries: formula sheet

Full chapter guide

Key formulas

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.
HRA exempt amount (old regime): Exempt HRA = Least of: (a) actual HRA received; (b) rent paid − 10% of salary; (c) 50% of salary if the house is in a specified metro city, otherwise 40% of salary; Work out each figure for the same period (full year or the months of rent paid). Salary for this purpose means basic salary plus dearness allowance that forms part of retirement benefits, plus commission based as a fixed percentage of turnover. Do not add other allowances.
Taxable HRA: Taxable HRA = HRA received − Exempt HRA; If no rent is paid, nothing is exempt and the whole HRA is taxable. If (b) is negative, the exemption is nil.
Allowance for official duty: Exempt = Lower of amount received and amount actually spent for duty; Taxable = excess, if any; Applies to travelling, daily, conveyance, helper, research and uniform allowances. Keep proof of actual expenditure in mind: the question must give the amount spent.
Children education and hostel allowance: Exempt = Limit per child per month × number of children (maximum two children) × months, restricted to the amount received; Old regime only. The limit per child per month is stated in the question or ICAI material for the year. Hostel allowance has its own separate limit and the same two-child cap per employee.
Transport allowance: Ordinary employee: fully taxable. Certain disabled employees: exempt up to the monthly limit in the rules; The disabled-employee exemption is for specified disabilities and is also available under the new regime. Transport allowance given to meet official conveyance cost is covered by the official duty rule instead.
Fully taxable allowances: Dearness, city compensatory, overtime, tiffin, fixed medical, general special allowance = 100% taxable; Add the full amount received to salary income.
Gratuity: Central Government, State Government and local authority employees: Exempt = entire gratuity; Applies to Central Government, State Government and local authority employees (and Defence/Armed Forces personnel). No limit. Statutory corporation employees are not in this group. They follow the Payment of Gratuity Act or non-Act formula below.
Gratuity: covered by Payment of Gratuity Act, 1972: Exempt = least of (a) 15 ÷ 26 × last drawn salary × completed years of service (part of year over 6 months counts as one year); (b) ₹20,00,000; (c) actual gratuity received; Month is taken as 26 days. Salary = basic + DA (if terms provide) + commission on fixed % of turnover.
Gratuity: not covered by the Act: Exempt = least of (a) ½ × average monthly salary × completed years of service (ignore fractions); (b) ₹20,00,000; (c) actual gratuity received; Average salary = average of the last 10 months immediately before retirement. Do not round up the years.
Gratuity on death: Exempt = entire gratuity; Gratuity paid on the employee's death is fully exempt.
Leave encashment on retirement: Government employee: Exempt = entire amount; Central and State Government employees only. Local authority and statutory corporation employees are not covered by this full exemption.
Leave encashment on retirement: other employees: Exempt = least of (a) 10 × average monthly salary; (b) ₹25,00,000; (c) amount actually received; (d) unavailed leave days (max 30 per year of service, less leave already taken or encashed) ÷ 30 × average monthly salary; Average salary is for the last 10 months before retirement. Leave encashed while in service is taxable. The ₹25,00,000 limit is a lifetime limit across employers.
Uncommuted pension: Taxable in full as salary; Regular pension from a former employer is salary. Family pension is taxed under Income from Other Sources, not Salaries.
Commuted pension: Government and similar employees: Exempt = entire commuted amount; Applies to Central/State Government employees (and Defence personnel or pension under notified schemes). Local authority and statutory corporation employees do not get full exemption. They are treated like other employees below.
Commuted pension: other employees: Total pension value = commuted amount ÷ % commuted × 100. Exempt = ⅓ of total value if gratuity is also received; ½ of total value if no gratuity is received; Applies to private employees and also to local authority and statutory corporation employees. Exempt amount cannot exceed the amount actually received. Remaining (uncommuted) pension is taxable.
Retrenchment compensation: Exempt = least of (a) the amount computed under the Industrial Disputes Act, 1947 (15 days' average pay × completed years of service, part over 6 months counts as one year); (b) ₹5,00,000; (c) actual compensation; Exemption is not available if the compensation is paid under any scheme which the Central Government has notified for the purpose of the Act. Use the average pay given in the question.
Voluntary retirement compensation: Exempt = least of (a) ₹5,00,000; (b) 3 months' salary × completed years of service; (c) salary at retirement × months of service left; (d) actual amount; Only if the scheme meets the prescribed conditions. Exemption is lifetime aggregate across employers.
Salary for the 12% limit (RPF): Salary = Basic + DA (if it forms part of retirement benefits) + Commission as a fixed % of turnover; Do not add bonus, allowances like HRA, or perquisites.
RPF employer contribution: Taxable = Employer contribution − 12% × Salary (if positive); The excess is taxed as salary. The employee's own contribution has no 12% cap; it is only eligible for deduction (old regime) within the savings limit.
RPF interest: Taxable interest = Interest credited − Interest at 9.5% p.a.; Only the excess over the notified rate is taxed as salary. Interest is worked on the running balance, so use the monthly balances or the base the question gives.
Interest on the employee's contribution above the yearly limit: Interest on the employee's own contributions to a statutory or recognised provident fund in the year above ₹2,50,000 is taxable. The limit is ₹5,00,000 where there is no employer contribution to the fund.; Does not apply to PPF. Kept in a separate account and taxed as income from other sources, so it does not enter the 12%/9.5% working.
Statutory PF: Interest and withdrawal: exempt, subject to the excess-contribution interest rule (interest on the employee's own contributions above the yearly limit is taxable); The employee's own contribution is paid from taxable salary and is eligible for a deduction in the old regime only.
PPF: Deposits: limited to ₹1,50,000 per year. Interest and maturity amount: exempt; PPF has no employer contribution. The ₹2,50,000/₹5,00,000 excess-contribution interest rule does not apply to PPF. The deposit is paid from taxable salary and is eligible for a deduction in the old regime only.
Unrecognised PF: On payment: Employee contribution = not taxed in the payout; Interest on employee contribution = other sources; Employer contribution + its interest = profits in lieu of salary; Nothing is taxed yearly. Tax is on the payout. The employee's contribution came from taxed salary. Where it was earlier allowed as a deduction, it is taxed in the year of withdrawal only to the extent the Act provides for it.
NPS employer contribution: Deduction = lower of Employer contribution and (10% or 14%) × (Basic + DA); 14% for government employees in both regimes, and for all employees in the new regime. 10% only for non-government employees in the old regime.
NPS exit: Lump sum up to 60% of corpus: exempt; Annuity pension: taxable when received; The 40% used to buy an annuity is not taxed at purchase.
Overall cap on employer contributions: Taxable perquisite = (Employer contributions for the year to RPF + NPS + Superannuation) − ₹7,50,000 (if positive), plus yearly interest or growth on the excess; Test the aggregate of all employer contributions to the three funds, whether or not each is within its individual limit. An amount already taxed because it exceeds an individual limit is not taxed again under the cap.
RPF early withdrawal (less than 5 years, no valid reason): Employer contribution + interest on it: salary; Employee contribution: not taxed again; Interest on employee contribution: other sources; Where the employee's contribution was earlier allowed as a deduction, it is taxed in the year of withdrawal only to the extent the Act provides for it.
Income from Salaries: Gross salary − deductions against salary; Gross salary is the sum of all taxable salary items after applying exemptions and valuation rules.
Standard deduction: Flat amount for the tax year, limited to the salary income (gross salary) chargeable; Use the amount given in the question or ICAI material. If salary is lower than the amount, the deduction equals the salary.
Entertainment allowance deduction: Least of: (a) actual allowance received, (b) 1/5 of basic salary, (c) ₹5,000; Only for government employees. Add the full allowance to gross salary first. Basic salary excludes DA unless terms of employment include it for retirement benefits, and excludes other allowances.
Professional tax: Deduction = professional tax actually paid during the year; Claim it only if the question allows it. If the employer pays it on the employee's behalf, first include it as a perquisite, then deduct it.
Relief for arrears or advance salary: Relief = (A) − (B), where A = tax on total income of the current year including arrears minus tax on that income excluding arrears; B = for each earlier year the arrears relate to, tax on that year's income including the arrears minus tax excluding them, summed over those years; Allowed only if A is greater than B. Use the tax figures or slab rates of each respective year, as given in the question. It is claimed in the prescribed form. It is a relief against tax, not a deduction from income.

Quick revision

Salary is taxed under this head only where an employer-employee relationship exists.
Salary is taxable on the earlier of its due date or the date of receipt, and the same salary is not taxed again when it is later received. Arrears and advance salary are taxed in the year of receipt, with relief available where applicable.
Always check whether an allowance is fully taxable, partly exempt or fully exempt.
Check the condition for each exemption, such as actual expenditure or a fixed limit.
Perquisite valuation differs for different categories of employee, so identify the category first.
Gratuity exemption depends on whether the employee is covered by the Payment of Gratuity Act.
Leave salary exemption on retirement is limited by a formula and a monetary cap.
Provident fund treatment depends on the type of fund: statutory, recognised, unrecognised or public provident fund. The Public Provident Fund is an individual scheme and does not involve employer contributions.
Pension is taxable as salary, and commuted pension has its own exemption rules.
Compute taxable salary in order: gross salary, exemptions, deductions, taxable salary.
Use the 2025 Act's terms and write tax year, never assessment year.
Attempt every MCQ because there is no negative marking.

Common mistakes

Taxing salary only when it is received 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 Fix: Tax it once, in the earlier year. Write 'already taxed' next to the later entry and exclude it.
Taking salary for HRA as total of all pay components, including special allowance and bonus. Fix: For HRA, salary is only basic, DA that forms part of retirement benefits, and commission fixed as a percentage of turnover. Leave out all other allowances, bonus and perquisites.
Using 50% for any city and 40% for small towns without checking the specified city list. Fix: Use 50% only for the cities specified in the rules or in the question. Read the city carefully and use 40% for every other place.
Using 30 days instead of 26 days for gratuity under the Payment of Gratuity Act Fix: For the 15-days gratuity formula under the Act, use 15 ÷ 26. For leave encashment use 30 days.
Rounding up part years for gratuity of employees not covered by the Act Fix: Under the Act, a part over 6 months counts as a full year. For employees not covered, take completed years only and ignore fractions.
Taking 12% on total pay including HRA, bonus and all allowances Fix: For this limit use basic + DA (only if it counts for retirement benefits) + commission on turnover only.
Treating the whole employer contribution to RPF as taxable, or the whole as exempt Fix: Compute 12% of salary, compare with the actual contribution, and tax only the excess.
Claiming entertainment allowance for a private-sector employee. Fix: Check the employer type first. If not government service, the deduction is nil and the allowance stays fully taxable.
Deducting professional tax or entertainment allowance when the question says only the standard deduction is available. Fix: Read what the question allows and claim only those deductions. Write your assumption at the top of your answer.

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'.
Write the regime in the first line of your answer. It decides whether HRA and children education exemptions are even available.
Show the HRA three limbs separately and name the least. Step marks sit on each limb.
In MCQs, check the city, the months of rent paid and what is included in salary before calculating. The traps are usually here.