Taxation · Salaries

Deductions from Salary and Computation of Taxable Salary

Updated 4 October 2026 · Fact-checked

Taxable salary is gross salary less the deductions the Income-tax Act, 2025 allows against salary: standard deduction, entertainment allowance (government employees only) and professional tax paid, as the question permits. Start with gross salary, subtract the deductions to reach Income from Salaries, and claim arrears relief separately against tax.

Understand Deductions from Salary and Computation of Taxable Salary

Income from Salaries is worked out in two stages. First you add up everything that is taxable as salary: basic pay, dearness allowance, taxable allowances, taxable perquisites, bonus, and taxable retirement benefits. This total is gross salary. Then you subtract the few deductions that the Income-tax Act, 2025 permits against salary. The result is income chargeable under the head Salaries.

The deductions are few. The standard deduction is a flat amount given to a salaried person. It is limited to the salary income chargeable (your gross salary), so it can never be more than that. Use the amount stated in the question or in the ICAI study material for tax year 2026-27. Do not carry an amount over from an earlier year. Entertainment allowance is deductible only for government employees. Professional tax (a state levy on employment) is deductible only for the amount actually paid in the year. The order in which you subtract these deductions does not change the result.

So the question decides which deductions you may claim. Read it for the tax regime and for any statement about which deductions are allowed, and follow it. If it says nothing, state your assumption clearly at the top of your answer.

Relief for arrears works differently. It is not a deduction from income. It is a relief against tax. When you receive salary arrears or advance salary in a year, they are taxed in that year, which may push you into a higher slab. The relief spreads the arrears over the earlier years they belong to and reduces the extra tax. You claim it in the prescribed form and compute it as a comparison of tax in two sets of years. Use the tax figures or slab rates of the respective years that the question gives you.

The full computation is a ladder: list each salary item, apply the exemption or valuation rule for each, reach gross salary, subtract deductions, and stop at Income from Salaries. Chapter VI-A style deductions (such as savings or health deductions) come later, at the total income stage, not here.

Key rules to remember

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.

How to solve Deductions from Salary and Computation of Taxable Salary questions

Use this method for every salary computation question. It keeps you in the right order and earns step marks even if one figure goes wrong.

1Note the regime and the deductions the question allows, and whether the employee is a government or non-government employee. State your assumption if the question is silent.
2List each salary item in a table: basic, DA, bonus, commission, allowances, perquisites, retirement benefits. Apply the exemption or valuation rule to each and write only the taxable amount.
3Add the taxable amounts to reach gross salary.
4Apply the deductions the question allows: entertainment allowance (government employee only), professional tax paid, and standard deduction. The order does not change the result, so follow one order and keep it.
5Remember that the standard deduction is limited to the salary income (gross salary) chargeable. Check this limit, then compute Income from Salaries.
6If arrears or advance salary are given, compute the relief separately, after the tax on total income is known, and subtract it from the tax payable.
7Write the final figure clearly and note which items you left out and why.

Quickest way: Fast salary computation under time pressure

When to use it: Use it for 5 to 10 mark computation questions and for MCQs that ask for Income from Salaries or a single deduction.

For MCQs: first check which deductions the question allows. If it says only the standard deduction applies, you can usually eliminate options that subtract anything else.
For an entertainment allowance MCQ: check government employee first. If not, the deduction is nil. If yes, take the lowest of three numbers: actual, 1/5 of basic, ₹5,000. The answer is usually ₹5,000.
Write the written answer as a two-column table: particulars and amount. Mark each line as taxable or exempt so that the examiner sees every step.
Put the deductions on separate lines with their working in brackets beside them.
For arrears relief, set up a four-row comparison table: tax with arrears and without in the current year, then tax with arrears and without in each earlier year. Subtract and compare at the end.

Common mistakes in Deductions from Salary and Computation of Taxable Salary

Claiming entertainment allowance for a private-sector employee.
Students remember the three-way least-of rule but forget the condition that the employee must be a government 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.
Students apply the full list of deductions by habit without reading the regime or instruction in the question.
Fix: Read what the question allows and claim only those deductions. Write your assumption at the top of your answer.
Forgetting to include the entertainment allowance in gross salary before deducting it.
Students deduct ₹5,000 from gross salary that never had the allowance in it.
Fix: Add the full allowance received to gross salary first, then deduct the permitted amount.
Using a standard deduction amount from an earlier year or from memory.
Older material quoted a different figure and amounts change over time.
Fix: Use the amount given in the question or in ICAI material for the tax year, and apply the limit of the salary income chargeable.
Treating relief for arrears as a deduction from salary income.
It appears in the salary chapter, so students deduct it while computing Income from Salaries.
Fix: Arrears are fully taxed in the year of receipt. The relief is subtracted only from the tax payable at the end.
Deducting professional tax on an accrued basis rather than a paid basis.
Students follow the accrual idea from other heads.
Fix: Deduct only the professional tax actually paid in the year, as the question states.

Worked examples

Example 1

Mr. Rao is a government employee. For tax year 2026-27 he receives: basic salary ₹6,00,000, dearness allowance ₹60,000, bonus ₹50,000, entertainment allowance ₹24,000 and a taxable perquisite valued at ₹30,000. He paid professional tax of ₹2,400. Compute Income from Salaries (a) under the old regime, where, as the question states, the standard deduction is ₹50,000 and entertainment allowance and professional tax are also deductible, and (b) under the new regime, where, as the question states, only a standard deduction of ₹75,000 is allowed and entertainment allowance and professional tax are not deductible. The standard deduction amounts are assumed data given in the question.

Show the solution

Gross salary = 6,00,000 + 60,000 + 50,000 + 24,000 + 30,000 = ₹7,64,000. This is the same under both regimes.
(a) Old regime. Entertainment allowance deduction is the least of: actual ₹24,000; 1/5 of basic = ₹1,20,000; ₹5,000. So the deduction is ₹5,000.
Professional tax paid = ₹2,400. The question allows it as a deduction in the old regime.
Standard deduction under the old regime = ₹50,000 (the amount given in the question), which is well within the salary income of ₹7,64,000.
Income from Salaries (old regime) = 7,64,000 − 5,000 − 2,400 − 50,000 = ₹7,06,600.
(b) New regime. As the question states, entertainment allowance and professional tax are not allowed as deductions. Only the standard deduction of ₹75,000 (the amount given in the question) applies, and it is within the salary income of ₹7,64,000.
Income from Salaries (new regime) = 7,64,000 − 75,000 = ₹6,89,000.

Answer: Income from Salaries is ₹7,06,600 under the old regime (part a) and ₹6,89,000 under the new regime (part b).

Example 2

Ms. Mehta received salary arrears in tax year 2026-27 of ₹90,000. Of this, ₹60,000 relates to 2025-26 and ₹30,000 relates to 2024-25. The tax figures below are assumed data given in the question, worked at the slab rates of the respective years. Tax on 2026-27 total income including arrears is ₹1,45,000 and excluding arrears is ₹1,12,000. For 2025-26, tax including ₹60,000 is ₹48,000 and excluding it is ₹40,000. For 2024-25, tax including ₹30,000 is ₹30,500 and excluding it is ₹27,500. Compute the relief for arrears.

Show the solution

Note: the earlier years 2025-26 and 2024-25 fall before the Income-tax Act, 2025 took effect, so their tax is computed under the law applicable to those years. Use the tax figures or slab rates the question gives for them, as done here.
Step A: extra tax in the current year = 1,45,000 − 1,12,000 = ₹33,000.
Step B for 2025-26: 48,000 − 40,000 = ₹8,000.
Step B for 2024-25: 30,500 − 27,500 = ₹3,000.
Total of B = 8,000 + 3,000 = ₹11,000.
Relief = A − B = 33,000 − 11,000 = ₹22,000.
A is greater than B, so the relief is allowed.

Answer: Relief for arrears is ₹22,000. Subtract it from the tax payable for tax year 2026-27.

Exam tips

Write the regime at the top of every salary computation. It is a one-line habit that protects several marks.
Memorise the three-way test for entertainment allowance and the words 'government employee'. Examiners test this condition more than the arithmetic.
In arrears questions, present the A and B working in a small table. Marks are given for each tax difference even if the final answer is wrong.
In MCQs on standard deduction, check whether salary income is less than the limit. The deduction is limited to the salary income chargeable.
Do not apply Chapter VI-A style deductions inside the salary head. Keep them for the total income stage.

Practice questions from Salaries

Deductions from Salary and Computation of Taxable Salary in other exams

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

Deductions from Salary and Computation of Taxable Salary: frequently asked questions

What is the standard deduction for salaried people in tax year 2026-27?

It is a flat deduction from your gross salary, limited to your salary income chargeable. You get it without producing any proof of expenses. Use the amount given in the question or in the ICAI study material for the year.

Who can claim the entertainment allowance deduction?

Only government employees. The deduction is the least of the actual allowance, 1/5 of basic salary and ₹5,000. A private employee gets no deduction, so the allowance is fully taxable.

Is professional tax deductible from salary?

Professional tax actually paid in the year is deducted from gross salary when the question allows it. If your employer pays it for you, first include it as a perquisite and then deduct it. Always follow the instruction in the question.

How is relief for arrears of salary calculated?

Compare the extra tax caused by the arrears in the year of receipt with the extra tax they would have caused in the earlier years they belong to. The excess of the first over the second is your relief. If there is no excess, there is no relief. It is claimed in the prescribed form and reduces tax payable, not income.