CMA Intermediate · Direct and Indirect Taxation
Income from Salaries for CMA Inter Paper 7
Income from salaries is the income you earn from an employer under an employer-employee relationship. To solve a question, confirm the relationship, add salary, taxable allowances and perquisites, add profits in lieu of salary, subtract the permitted deductions, and show the net figure in a clean statement.
What this chapter covers
This chapter covers the head of income called Salaries. It starts with who is an employee and what counts as salary. It then moves through allowances, perquisites, retirement benefits and the deductions allowed from salary income, and ends with a full computation.
In Paper 7, every individual-assessee question usually begins with salary. The same skills (reading facts, classifying items, building a statement) carry into house property, business income, capital gains and total income computation. The Income-tax Act, 2025 applies, so you work with the tax year 2026-27 and the new section numbers, not the 1961 Act.
The chapter is mostly rule application. You must decide whether each item is taxable, exempt or valued by a special rule. Then you put the result in the correct place in a statement. This is why it suits both MCQs and 14-mark numerical questions.
Salary is the income most students meet first, and it is one of the most predictable places to score in the written section. Questions are built from many small rules, so each correct classification earns a step mark even if the final figure is wrong. The chapter also feeds MCQs in Section A, where one rule is tested at a time. Strong work here makes later chapters easier, because total income questions often start with a salary computation.
Salaries: topics in the order to study them
- 1Basis of Charge and Meaning of SalaryStart here to learn when salary is taxable and what counts as salary, since every later topic builds on this.
- 2Allowances Taxable and ExemptAllowances are the simplest add-ons to basic salary, so you can learn the taxable versus exempt split before the harder valuation rules.
- 3Perquisites and Valuation RulesThis is the largest and most calculation-heavy topic, and it needs the salary and allowance basics first.
- 4Profits in Lieu of Salary and Retirement BenefitsLearn these after regular pay items, because they cover payments at the end or change of employment, such as gratuity, leave encashment and pension.
- 5Deductions from Salary IncomeStudy the deductions allowed against salary income once you know what is included, so you know exactly what you are reducing. Section 29 is not part of this topic. It applies to an employer in computing income chargeable under section 26, so treat it as a separate employer-side cross-reference.
- 6Computation of Income under the Head SalariesFinish with full computation, which pulls every earlier topic into one statement and tests your sequencing.
How to prepare Salaries
Prepare this chapter as a set of classification rules first and a computation skill second. Use the order above and practise in short sessions that fit around work or college.
- Read the basis of charge and meaning of salary, and write a one-page list of what is salary and what is not.
- Make a two-column sheet for allowances: taxable in full, and exempt up to a limit or condition. Check each limit against your ICMAI material for the tax year 2026-27.
- Learn perquisites by category, such as accommodation, car, loans and free services. Write each valuation rule once, then solve one small example for each.
- Group retirement benefits by type and note who is eligible and what the exemption conditions are.
- Learn the deductions an employee can claim against salary income, such as the standard deduction and professional tax, as listed in your ICMAI material for the tax year 2026-27. Do not bring section 29 into this step. Section 29 lets an employer deduct certain employee-welfare contributions when computing its own income under section 26 (business income). Employer contributions are never deducted from an employee's salary income. Keep section 29 as a separate cross-reference note for business income.
- Practise full computations in a fixed layout: salary, allowances, perquisites, profits in lieu, gross salary, deductions, net income from salaries.
- Do Section A style MCQs after each topic, then redo your wrong answers a week later.
Common mistakes in Salaries
Using the Income-tax Act, 1961 terms and section numbers.
Fix: Use tax year 2026-27 and the Income-tax Act, 2025 in every answer, and check any outside material against ICMAI's current text.
Taxing or exempting an allowance without checking the condition.
Fix: Keep a one-line rule for each allowance and test the facts in the question against it before deciding.
Mixing employer-side and employee-side deductions.
Fix: Label each deduction with who claims it. Section 29 covers deductions in the hands of the employer.
Treating a gratuity provision as deductible in all cases.
Fix: Remember that section 29(2) bars a deduction for a general provision, and section 29(1)(d) allows only specific provisions.
Skipping steps in the computation and showing only the final figure.
Fix: Show each head of salary, each exemption and each deduction on its own line so step marks are protected.
Ignoring the facts that decide the answer, such as the type of employer or the employee's salary level.
Fix: Underline the facts first, then pick the rule that matches them.
Last-day revision: Salaries
- 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.
Salaries practice questions
- Mr. Dev Malhotra is a partner in Malhotra & Co., a partnership firm. During the tax year the firm paid him Rs. 3,00,000 as salary and Rs. 50…
- Mr. Harish Patel is a partner in Patel & Sons, a partnership firm. The firm paid him Rs. 5,00,000 as salary and Rs. 1,00,000 as commission d…
- Mr. Kabir Sethi, who left Bharat Steels Ltd. two years ago, receives in the current tax year Rs. 1,20,000 as arrears of salary from the comp…
- A company provides its employee Kavita with furniture that it owns, bought for ₹2,00,000, for use in her residence throughout the year. Kavi…
- Ravi Mehta, an employee of a private company, is given an interest-free loan of ₹6,00,000 on 1 April 2026 and repays nothing until the end o…
- Under section 392 of the Income-tax Act, 2025, at what rate must the person responsible for paying salary deduct tax at source, and when?
- Sunita, assessed under the new regime, is due salary of Rs 6,00,000 for the tax year. In the same tax year her employer also pays her Rs 40,…
- Ms. Deepa Nair received Rs. 60,000 in the current tax year as salary for the next tax year, paid in advance by her employer. In the next tax…
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
Is the Income-tax Act, 2025 used for Salaries in CMA Inter June 2027?
Yes. The Income-tax Act, 2025 governs income from 1 April 2026, so you use tax year 2026-27 and its section numbers. Do not use assessment year or the 1961 Act numbering.
How should I study Salaries for the MCQ section?
Learn each rule as a one-line statement with its limit or condition. Then practise standalone questions on one rule at a time. There is no negative marking, so attempt every MCQ.
What is the best order to study this chapter?
Start with basis of charge and meaning of salary, then allowances, perquisites, and profits in lieu of salary and retirement benefits. Study deductions next and finish with the full computation.
What does section 29 of the Income-tax Act, 2025 deal with?
It deals with deductions related to employee welfare for an employer. These include contributions to a recognised provident fund, an approved superannuation fund, a notified pension scheme within a 14% limit, and an approved gratuity fund. It also restricts gratuity provisions and other fund contributions.