Salaries: formula sheet

Key formulas

Basis of charge, due

Salary due in the tax year is taxable, whether paid or not (s. 15(1)(a))

Outstanding salary is taxed in the year it falls due. Non-payment does not defer it.

Basis of charge, advance

Salary paid or allowed in the tax year, though not due or before due, is taxable (s. 15(1)(b))

Advance salary is taxed in the year of receipt. If so taxed, it is not taxed again when due (s. 15(3)).

Basis of charge, arrears

Arrears paid or allowed in the tax year are taxable if not charged to tax earlier (s. 15(1)(c))

Arrears are taxed once only. Check whether they were already charged to tax in an earlier tax year.

Employer

Employer includes former employer (s. 15(2))

Pension from a former employer is salary.

Partner's remuneration

Partner's salary, bonus, commission or remuneration from the firm is not salary (s. 15(4))

It is not taxed under this head. It is dealt with under business income.

Meaning of salary

Salary includes items (a) to (l) of section 16

Wages, pension, gratuity, fees, commission, perquisites, profits in lieu, advance salary, leave encashment and more.

Relief on arrears or advance

Relief on application under section 157 where income is taxed at a higher rate due to such receipts

No relief on income for which a deduction is claimed under section 19(1) (Sl. No. 12).

HRA exempt amount

Exempt HRA = least of (a) HRA actually received, (b) rent paid − 10% of salary, (c) 50% of salary (metro city) or 40% of salary (other city)

Compute on the period for which rent was paid. Taxable HRA = HRA received − exempt HRA. Use the list of metro cities given in the rules or in the question.

Salary for HRA

Salary = Basic + DA (only if it forms part of pay for retirement benefits) + commission based on a fixed percentage of turnover

Leave out other allowances, bonus, perquisites and fixed commission.

Children education allowance

Exempt = limit per month per child as per the rules under the Income-tax Act, 2025 (use the figure given in the question), up to the number of children allowed by the rules

Any amount above the limit is taxable. Old regime. Do not rely on a remembered figure; take the limit from the question.

Hostel allowance

Exempt = limit per month per child as per the rules under the Income-tax Act, 2025 (use the figure given in the question), up to the number of children allowed by the rules

The child must be in a hostel. Old regime. Take the limit from the question.

Transport allowance for a specially abled employee

Exempt = limit per month as per the rules under the Income-tax Act, 2025 (use the figure given in the question)

This is for commuting between home and office by an employee who is eligible under the rules as a specially abled person. A general commuting allowance for others is taxable.

Allowances exempt to the extent spent

Exempt = lower of allowance received and amount actually spent for the official purpose

Applies to travel or transfer, daily, conveyance (for duty), helper, research and uniform allowances. Excess is taxable.

Fully taxable allowances

DA, CCA, special allowance, overtime allowance, general transport allowance = taxable in full

Add the whole amount received to salary.

General rule

Taxable perquisite = Value of benefit − Amount recovered from or paid by employee

Applies to every perquisite. Valuation basis is prescribed in the rules.

Rent-free accommodation (employer-owned)

Value = prescribed % of salary for the period of occupation (rate depends on city population)

Use the % given in the question. Add furniture value if furnished. Salary means the salary as defined for perquisite valuation, not gross receipts.

Rent-free accommodation (employer-leased)

Value = Lease rent actually paid by employer OR prescribed % of salary, whichever is lower

Check the rule for your term. Furniture is added in addition.

Concessional accommodation

Taxable value = Value of rent-free accommodation − Rent paid by employee

Section 17(1)(b): taxed only to the extent it exceeds rent recoverable or payable by the employee.

Concessional loan

Perquisite = (Prescribed lending rate − Rate charged) × Outstanding balance × Period

Use the prescribed rate (the SBI rate given in the question) and, normally, the monthly outstanding balance. Small loans and loans for specified diseases are generally exempt under the rules.

Motor car

Value depends on the use (private, official, or mixed), who bears the running costs, and engine capacity; amounts are fixed by the rules

Fully private use: actual cost to employer (plus wear and tear and driver, if any) less recovery. Fully official use: nil, if records are kept.

Specified securities and sweat equity

Value = Fair market value on the date the option is exercised − Amount paid by or recovered from the employee

Section 17(4)(h).

Employer contributions above the limit

Taxable = Aggregate contribution to recognised PF, section 124(1) scheme and approved superannuation fund − ₹7,50,000 (in a tax year)

Section 17(1)(h). Annual accretion on the excess is also a perquisite under clause (i).

Gratuity: Government employee

Fully exempt

No limit applies.

Gratuity: non-Government, covered by the Payment of Gratuity Act

Exempt = least of (a) last drawn salary × 15 ÷ 26 × completed years of service (part year over 6 months counts as a full year); (b) ₹20,00,000; (c) gratuity actually received

Salary means basic + DA (if terms include it for retirement benefits). A month is taken as 26 days.

Gratuity: non-Government, not covered by the Act

Exempt = least of (a) ½ × average monthly salary × completed years of service (ignore any fraction); (b) ₹20,00,000; (c) gratuity actually received

Average salary is of the 10 months before retirement. Salary includes basic, DA (as per terms) and commission on a fixed percentage of turnover.

Leave encashment on retirement: non-Government

Exempt = least of (a) 10 × average monthly salary; (b) ₹25,00,000; (c) months of unavailed leave entitlement × average monthly salary; (d) amount received

Entitlement is capped at 30 days per year of actual service, less leave availed. Average salary is of the last 10 months. Government employees: fully exempt. Leave encashment while still in service is fully taxable.

Commuted pension: non-Government

Exempt = ⅓ of full value of pension if gratuity is also received; ½ of full value if no gratuity is received. Full value = commuted amount ÷ % commuted × 100

Government employees: fully exempt. Uncommuted (periodic) pension is taxable as salary.

Voluntary retirement compensation

Exempt up to ₹5,00,000 (aggregate for all such payments), if received under an approved scheme; excess taxable as salary

The scheme must meet the prescribed guidelines. The exemption is lost if you claimed it earlier from another employer.

Retrenchment compensation

Exempt = least of (a) 15 days' average pay × completed years of service (part over 6 months counts as full year), as per the Industrial Disputes Act, 1947; (b) ₹5,00,000; (c) amount received

Applies to workmen retrenched under the Industrial Disputes Act. Amounts above the limit are taxable as salary.

Recognised provident fund (RPF)

Employer's contribution exempt up to 12% of salary; interest exempt up to the notified rate (9.5% p.a.); lump sum at retirement exempt if at least 5 years' continuous service

Excess employer contribution and excess interest are taxable as salary each year. Salary = basic + DA (as per terms) + commission on fixed percentage of turnover.

Unrecognised provident fund (URPF)

Employer's contribution and interest on it: not taxed yearly; taxable as salary at payment. Employee's contribution: not taxable. Interest on employee's contribution: taxable as Income from Other Sources at payment

Contrast with RPF, where the exemption is allowed if conditions are met.

Employer contribution cap

Employer's total contribution to RPF, NPS and superannuation fund above ₹7,50,000 in a year is taxable as a perquisite

Interest or other income on the excess is also taxable. Check this limit if the question gives large contributions.

Standard deduction

Lower of (₹75,000 new regime / ₹50,000 old regime) and salary income

Flat amount, no proof needed. It cannot exceed the salary income, so it cannot make the head Salaries negative.

Entertainment allowance (Government employee, old regime)

Least of: (a) actual allowance received; (b) 1/5 of basic salary; (c) ₹5,000

Basic salary means basic pay only, excluding allowances and perquisites. Not for non-Government employees.

Professional tax

Actual tax on employment paid in the year

Old regime only. If the employer pays it for the employee, add it as a perquisite first and then deduct it.

Order of computation

Income from Salaries = Gross salary − entertainment allowance deduction − professional tax − standard deduction

Add the entertainment allowance into gross salary before deducting it.

Income under the head Salaries

Net taxable salary = Gross salary (all taxable components) − Deductions allowed against salary

Gross salary includes taxable allowances, taxable perquisites and profits in lieu of salary. Use only the deductions allowed under the regime in the question.

Standard deduction (new regime)

Standard deduction = ₹75,000, or the salary income if it is lower

Check the regime stated. Do not claim the old-regime deductions when the question applies the default regime.

Employer-paid tax on non-monetary perquisite

Tax paid by employer on non-monetary perquisite = Exempt in employee's hands

The perquisite itself is still taxed. Only the tax paid on it is left out.

Employer-paid tax on monetary salary

Taxable salary = Salary actually paid + Tax paid by employer on it

When the employer bears the tax and the net amount is given, gross up: Gross salary = Net amount grossed up at the applicable rates. Use the slab approach step by step.

Relief for arrears of salary

Relief = A − B, if A > B. A = Tax on total income of the year of receipt with arrears − tax on the same without arrears. B = Tax on total income of the earlier year to which arrears relate with arrears − tax on the same without arrears

If more than one earlier year is involved, compute B year by year and add. No relief if A is not greater than B. Relief is applied against tax before cess.

Quick revision

• Salary needs an employer-employee relationship; a payment outside that relationship is not salary.
• Check each allowance: fully taxable, partly exempt, or exempt on conditions.
• Perquisites are valued by the prescribed rules, not by what the employer paid unless the rule says so.
• Profits in lieu of salary cover payments linked to employment ending or changing, so classify them separately.
• Employer-side note (business income, not Salaries): under section 29, an employer's contribution to a recognised provident fund or an approved superannuation fund is deductible in computing income under section 26, subject to prescribed limits.
• Employer-side note: under section 29(1)(b), the employer's pension scheme contribution is deductible up to 14% of the employee's salary in the tax year.
• For that 14% limit, salary includes dearness allowance if the terms of employment so provide, but excludes all other allowances and perquisites.
• Employer-side note: section 29(2) bars a deduction for gratuity provision, except provision under section 29(1)(d) for an approved gratuity fund or for gratuity that became payable in the tax year.
• Employer-side note: under section 29(1)(e), an employee's contribution covered by section 2(49)(o) is deductible in the employer's income under section 26 only if the employer credits it to the employee's account in the relevant fund on or before the due date of filing the return under section 263(1) for the tax year.
• Use the term tax year, never assessment year, in every answer.
• Write the computation in the standard layout so each step can earn marks.

Common mistakes

• Taxing salary only when it is actually received. Fix: Remember section 15(1)(a): salary due in the tax year is taxable whether paid or not. Tax it in the year it falls due.
• Taxing arrears again in the year they are received when they were already taxed on a due basis. Fix: Tax arrears only if they were not charged to tax in an earlier tax year.
• Including all allowances, bonus or the whole DA in salary for the HRA limits. Fix: Use only basic, DA that counts for retirement benefits, and turnover-based commission.
• Taking 10% of salary instead of deducting it from rent. Fix: The second limit is rent paid minus 10% of salary. If the result is negative, exemption is nil.
• Forgetting to deduct the rent or amount the employee paid Fix: Make 'less: recovered from employee' a fixed last line in every working.
• Using total gross salary as the base for accommodation value Fix: Use the salary the question or rules treat as the valuation base. Include only items that count, and exclude perquisites themselves.
• Using 30 days instead of 26 days for gratuity under the Payment of Gratuity Act. Fix: For gratuity covered by the Act, use salary × 15 ÷ 26 × years. For leave, use 30 days per year of service for the entitlement.
• Rounding up part years for the not-covered gratuity formula. Fix: Round up part years over 6 months only where the Act applies. For the other formula, use completed years only.
• Allowing entertainment allowance deduction to a private-sector employee. Fix: Check the employer type first. For a non-Government employee, the full allowance stays taxable and no deduction is given.
• Taking 1/5 of gross salary instead of 1/5 of basic salary. Fix: Use basic pay only. Exclude all allowances, perquisites and bonus unless the question says otherwise.

Exam tips

• In MCQs, look for the trap word "received". If the salary was due in the year, it is taxable even if unpaid.
• For partner questions, state section 15(4) in one line and move on. Do not compute anything under Salaries.
• Quote the section number next to each treatment, such as s. 15(1)(a), (b) or (c). It earns step marks.
• In arrears and advance questions, always say whether the amount was taxed earlier. Examiners test the double-taxation protection.
• Mention section 157 relief in one sentence when arrears or advance salary are large. Do not compute the relief unless the question gives the prescribed method.
• In MCQs, watch for the three words that change the answer: metro city, rent actually paid, and DA forming part of retirement benefits.
• If rent paid is less than 10% of salary, write that exempt HRA is nil. Do not leave the step out.
• For fixed-limit allowances, use the limit given in the question and state it in your working.