CS Executive · Tax Laws and Practice

Income under the Head Salary: formula sheet

Full chapter guide

Key formulas

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.
General rule: Taxable allowance = Allowance received − Exempt part (if any); If no specific exemption applies, the full allowance is taxable as salary.
HRA exempt amount: Least of: (a) actual HRA received; (b) rent paid − 10% of salary; (c) 50% of salary for metro cities, 40% of salary for other places; Works for the period the house is actually occupied and rent is paid. Check your study material for which cities count as metro.
Salary for HRA: Salary = Basic + DA (only if terms of employment make it count for retirement benefits) + commission fixed as a percentage of turnover; Other allowances, bonus and perquisites are left out.
Taxable HRA: Taxable HRA = HRA received − Exempt HRA; If the employee pays no rent, the whole HRA is taxable.
Fully taxable allowances: DA, CCA, entertainment allowance, overtime allowance = 100% taxable; Government employees may get a separate deduction for entertainment allowance when computing taxable salary, limited by the Act. This is a deduction, not an exemption.
Children education and hostel allowance: Exempt: ₹100 per month per child (education) and ₹300 per month per child (hostel), up to two children; Amounts above these limits are taxable. Confirm the current amounts in your study material.
Value of a perquisite (general): Taxable perquisite = Value as per prescribed rules − Amount paid by or recovered from the employee; Always deduct what the employee paid. The value itself comes from the Rules or the question.
ESOP or sweat equity (section 17(4)(h)): Perquisite = Fair market value on the date the option is exercised − Amount actually paid or recovered; The date is the exercise date, not the grant date. Multiply by the number of shares.
Employer contribution to funds (section 17(1)(h)): Taxable = Total employer contribution in the tax year to recognised PF, the section 124(1) scheme and approved superannuation fund − ₹7,50,000 (only if positive); The ₹7,50,000 limit is aggregate across all three. Interest on the excess is also a perquisite under section 17(1)(i).
Life assurance or annuity premium (section 17(1)(g)): Sum payable by employer for life assurance or annuity of the employee = Perquisite; Not a perquisite if paid to a recognised PF, approved superannuation fund or Deposit-linked Insurance Fund.
Obligation paid by employer (section 17(1)(f)): Any sum paid by employer for an obligation of the employee = Perquisite; Examples: the employee's club bill or personal tax liability paid by the employer.
Furnished accommodation: Value = Value of unfurnished accommodation + Furniture charge (as prescribed) − Rent paid by employee; Use the furniture rate in the question or the Rules.
Profits in lieu of salary: test: Payment because of employment (before, during, on ending or on changing terms) − specific exemption = taxable under Salaries; Always check whether a separate exemption applies, for example gratuity, retrenchment compensation or approved voluntary retirement payment. Taxable only to the extent not exempt.
Exclusion of RPF accumulated balance (Sch. XI Pt A, para 8(1)): Excluded if: (a) continuous service ≥ 5 years; or (b) service ended by ill-health / contraction or closure of business / other cause beyond employee's control; or (c) transferred to new employer's recognised PF (to the extent transferred); or (d) entire balance moved to a notified pension scheme under section 124; Clauses (a) and (b) are alternatives. Clause (c) excludes only the amount actually transferred.
Service period when balance is transferred (para 8(2)): Continuous service = service with present employer + service with earlier employers whose balances were transferred in; Use this when the balance includes amounts transferred from previous recognised funds.
Tax when exclusion fails (para 9): Extra tax = Σ (tax for each year as if the fund were not recognised) − Σ (tax actually paid for those years); The extra tax is payable in the tax year in which the balance becomes payable, in addition to other tax.
TDS on such balance (para 10): Trustees or the authorised person deduct the para 9 amount at payment; Chapter XIX-B applies as if the balance were salary; Applies only where para 9 applies.
Interest above the notified rate (para 6): Interest credited at a rate above the Central Government notified rate = deemed received by employee and taxable in that tax year; After the 2026 amendment, para 6 deals only with excess interest. The old 12% employer-contribution test is no longer in its text.
Employee's own contribution (para 7): Deduction as determined under section 123; Relief is for the employee's contribution in the tax year, not for the balance paid out.
Gratuity of Government employee (death-cum-retirement): Deduction = entire amount received; Applies to gratuity under the central pension rules or similar schemes for Union, all-India, State civil services and local authority employees, as listed in section 19(2)(g). Defence retiring gratuity is also fully deductible.
Gratuity under Payment of Gratuity Act, 1972: Deduction = amount received, limited to the amount calculated under section 4(2) and (3) of that Act; Use the Act's formula only if the employee is covered by the Act.
Gratuity not covered by the 1972 Act: Deduction = Minimum of (a) actual gratuity, (b) limit notified by Central Government, (c) ½ month's average salary × completed years of service; Average salary is for the ten months before the month of the event. Salary means basic plus dearness allowance if the terms of employment provide for it. All other allowances and perquisites are excluded. Part years are ignored.
Aggregate gratuity limit: Deduction in the year ≤ A − B; A = limit notified by the Central Government. B = gratuity received in earlier tax years that was allowed as exemption or deduction. This applies to gratuity under the 'any other gratuity' entry.
Leave salary of Government employee: Deduction = entire cash equivalent received at retirement; Applies to Central and State Government employees.
Leave salary of other employees: Deduction = Minimum of (a) cash equivalent of earned leave at credit (leave entitlement not above 30 days per year of actual service), (b) 10 × average monthly salary for ten months before retirement, (c) limit notified by Central Government, (d) actual amount received; Salary includes dearness allowance only if terms of employment so provide. The aggregate across employers is also capped at A − B, with B being earlier amounts allowed.
Commuted pension, Government and similar schemes: Deduction = entire amount; Covers the Civil Pensions (Commutation) Rules and similar schemes for civil services, all-India services, defence, State services, and local authority or statutory corporation employees. Also entire amount if received from a fund in Schedule VII.
Commuted pension from other employers: If gratuity received: deduction = commuted value of ⅓ of pension. If no gratuity received: deduction = commuted value of ½ of pension; Commuted value is worked out considering age, health, interest rate and recognised mortality tables. In problems, the ratio is applied to the amount received: deduction = amount received × (⅓ or ½) ÷ (fraction of pension commuted).
Uncommuted pension: Fully taxable as salary; Regular monthly pension has no deduction in the Table.
Voluntary retirement compensation: Deduction = Minimum of (a) compensation received, (b) ₹5,00,000; Scheme must be of a listed employer and follow the prescribed guidelines. Deduction is allowed only once in a person's life, and not where relief under section 157 was claimed for the same amount.
Retrenchment compensation to workman: Deduction = Minimum of (a) compensation received, (b) amount under section 25F(b) of the Industrial Disputes Act, 1947, (c) notified amount, not less than ₹50,000; Compensation on closure or certain transfers of the undertaking is treated as retrenchment compensation. Compensation under an approved scheme is deductible in full.
Net taxable salary: Net taxable salary = Gross taxable salary − Deductions allowed from salary; Gross salary includes only taxable items. Exempt allowances and exempt retirement benefits are left out before you start.
Standard deduction: Allowed amount = lower of (fixed statutory amount, salary income); Old regime ₹50,000. New regime ₹75,000. It cannot create a negative salary. Confirm the amounts for tax year 2026-27 in your study material.
Entertainment allowance (government employees, old regime): Deduction = lowest of (1) allowance actually received, (2) 1/5 of basic salary, (3) ₹5,000; Basic salary here does not include DA or other allowances unless DA forms part of pay for retirement benefits under the terms of employment. Not available to non-government employees.
Professional tax (old regime): Deduction = professional tax actually paid in the tax year; Allowed on payment. If the employer paid it for the employee, it is first added to salary as a perquisite and then deducted.
Arrears relief – step A: A = Tax on total income of the current year including arrears − Tax on total income of the current year excluding arrears; This is the extra tax caused by adding arrears to the current year.
Arrears relief – step B: B = Tax on income of the earlier year including that year's share of arrears − Tax on income of that year excluding it; Repeat for each year to which arrears relate and add the results. This is the extra tax if the arrears had been taxed in the year they belong to.
Arrears relief – result: Relief = A − B (only if A is more than B); Section 157 gives relief on application, 'as may be prescribed'. The method above is the prescribed approach taught for this relief. If A is not more than B, there is no relief.

Quick revision

Salary includes pay, allowances, perquisites, annuities and retirement benefits received from an employer.
Test every item as fully taxable, partly exempt or fully exempt before adding it.
Perquisites are benefits in kind. Know who is taxed on them and how each is valued.
Profits in lieu of salary are payments linked to the job, such as compensation on termination.
Gratuity, leave salary and pension each have their own exemption rules. Check the type of employer.
Under section 29(1)(a), an employer's contribution to a recognised provident fund or approved superannuation fund is deductible, within prescribed limits.
Under section 29(1)(b), an employer's contribution to a pension scheme for an employee is deductible up to 14% of salary, which includes dearness allowance only if the terms of employment so provide.
Under section 29(1)(c), contributions to an approved gratuity fund held under an irrevocable trust are deductible.
Under section 29(2), a provision for gratuity is generally not deductible, except under section 29(1)(d). If allowed under (1)(d), the actual payment is not deducted again.
Use the tax year and the Income-tax Act, 2025 for June 2027, not the 1961 Act.
End each computation with a clear taxable salary figure and a one-line conclusion.

Common mistakes

Treating a partner's salary or commission from the firm as salary income. 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. Fix: Salary due in the tax year is taxable whether paid or not. Also tax it if paid in advance.
Treating DA, CCA or entertainment allowance as exempt or partly exempt. Fix: Remember the default: an allowance is taxable unless a specific exemption exists. DA, CCA and entertainment allowance have none.
Including all allowances in salary while computing the HRA limits. Fix: For HRA, salary means basic, DA that counts for retirement benefits, and turnover-based commission. Nothing else.
Taxing the employer's payment for the employee's medical treatment in a hospital maintained by the employer. Fix: Check section 17(2) first. Treatment in the employer's hospital is outside section 17(1).
Taking the ESOP value on the grant date or the sale date. Fix: Section 17(4)(h) fixes the date as the exercise date. Tax on later sale is capital gains, not salary.
Treating every termination payment as exempt. Fix: Treat compensation as taxable profit in lieu of salary by default. Exempt only the part that a specific provision covers.
Applying the five-year rule to an unrecognised fund. Fix: State first whether the fund is recognised. Then apply para 8.
Treating all gratuity as fully deductible. Fix: Check the employer first. Only Government and similar scheme gratuity is fully deductible. Others are limited by the 1972 Act formula or the least of three.
Including all allowances and perquisites in 'salary' for the formula. Fix: For gratuity and leave salary limits, use basic plus dearness allowance only if the terms of employment provide for it. Exclude everything else.

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.
Write the HRA formula first, then fill the numbers. Examiners give marks for the method even if arithmetic slips.
Always state the assumption on tax regime and the metro or non-metro status of the city in one line.
In theory questions, answer in three parts: the general rule (taxable unless exempt), the specific allowance and its treatment, then a conclusion.