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CA Intermediate · Taxation

Salaries for CA Intermediate Taxation: Chapter Study Guide

Salaries is the chapter on income earned from an employer-employee relationship. You solve it by confirming the relationship, listing every receipt (salary, allowances, perquisites, retirement benefits), applying the exemption or valuation rule to each, then deducting the allowed deductions to reach taxable salary for the tax year 2026-27.

What this chapter covers

Salaries covers how income from employment is taxed. It starts with the basis of charge: when salary is taxable, and what counts as salary. It then moves through allowances, perquisites, retirement benefits, provident funds and finally the deductions that lead to taxable salary.

The chapter is a list of receipts, and each receipt has its own rule. Some are fully taxable, some fully exempt, and some partly exempt up to a limit or a formula. Your job is to sort every item into the right bucket and compute the taxable part.

This chapter connects to the rest of Paper 3 Section A in two ways. Taxable salary is the first head of income in the computation of total income, so it feeds into questions on residential status, other heads, deductions and tax computation. Its rules also lean on the Income-tax Act, 2025 and its terms such as tax year, so you must use the 2025 Act's language and section numbers only. If you are unsure of a section number, write the rule without it.

Salaries is one of the most practical chapters in Section A, and it is rule-based, so careful practice turns directly into marks. Both MCQs and written questions draw on it: MCQs test a single exemption limit or valuation rule, and written questions often ask for a full computation of taxable salary as part of a larger problem. Because almost every individual computation includes a salary component, the chapter also pays off again when you solve comprehensive questions. Step marks are available for each correct item, so even a partly right answer scores if your working is laid out clearly.

Salaries: topics in the order to study them

  1. 1Basis of Charge and Meaning of SalaryIt defines what is taxed, when it is taxed and who is an employee, so every later rule makes sense.
  2. 2Allowances and Their TaxabilityAllowances are the simplest receipts to classify, so they build your habit of sorting items as taxable, exempt or partly exempt.
  3. 3Perquisites and Valuation RulesThis is the largest and most rule-heavy topic, so take it once you are comfortable with the basic salary structure.
  4. 4Retirement Benefits: Gratuity, Leave Salary and PensionThese benefits use formulas and limits, and they build on the meaning of salary you learned first.
  5. 5Provident Funds and Other Salary-Related ReceiptsProvident fund rules depend on the type of fund, and they pair naturally with the retirement benefits you just studied.
  6. 6Deductions from Salary and Computation of Taxable SalaryIt ties everything together into a full computation, so it must come last.

How to prepare Salaries

Treat Salaries as a sorting exercise first and a calculation exercise second. Learn the rule for each receipt, then practise putting them together in one format.

  1. Read the basis of charge and the meaning of salary, and make a one-page list of what is included in salary and what is not.
  2. For allowances, make a three-column table of fully taxable, partly exempt and fully exempt items, and note the condition attached to each.
  3. For perquisites, learn the valuation rule for each item and note who it applies to, since many rules differ for specified employees and others.
  4. For gratuity, leave salary and pension, write each formula in plain text and practise it with different salary and service figures.
  5. Solve questions on provident funds by first identifying the type of fund, then applying the rule for employer contribution, interest and withdrawal.
  6. Practise full computations in a fixed format: gross salary, less exemptions, less deductions, taxable salary. Show every working line.
  7. Before the exam, attempt MCQs on limits and conditions, since you have no negative marking and every question should be attempted.

Common mistakes in Salaries

  • Applying the same perquisite valuation rule to every employee.

    Fix: Before valuing any perquisite, write down the employee category and then pick the matching rule.

  • Treating all allowances as fully taxable or fully exempt.

    Fix: Keep a three-column list and revise the condition next to each item.

  • Using the wrong base for formulas such as gratuity or leave salary.

    Fix: State the base explicitly in your working, then substitute the figures.

  • Using Income-tax Act, 1961 language or section numbers.

    Fix: Use only the 2025 Act's terms such as tax year, and leave out a section number if you are unsure of it.

  • Presenting only the final figure in a computation.

    Fix: Show each item, its exemption and the resulting taxable amount on separate lines so you earn step marks.

  • Ignoring the date or timing of receipt.

    Fix: Check whether the amount is due or received in the tax year and apply the basis of charge.

Last-day revision: Salaries

  • 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.

Salaries practice questions

Salaries in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Salaries: frequently asked questions

Which Act should I use for Salaries in CA Intermediate?

From the May 2027 exam onwards, use the Income-tax Act, 2025 as amended by the Finance Act, 2026, for tax year 2026-27. Use its terms such as tax year, and not the 1961 Act's terms.

Which topic in Salaries should I study first?

Start with Basis of Charge and Meaning of Salary. It tells you what is taxed and when, and the later topics depend on it.

Is Salaries more about theory or numericals?

It is both. You need to know the rules and conditions for MCQs, and you need to apply them in a clean computation for the written answers.

How should I write a Salaries computation to earn step marks?

Use a fixed format with gross salary, exemptions, deductions and taxable salary. Show each item on its own line with a short working, so the examiner can award marks even if one figure is wrong.