Direct and Indirect Taxation · Salaries

Computation of Income under the Head Salaries for CMA Inter

Updated 10 October 2026 · Fact-checked

Computation of salary income means adding every taxable component (salary, allowances, perquisites, profits in lieu of salary), deducting only the deductions allowed for your tax regime, and arriving at net taxable salary. Then you adjust for employer-paid tax and, where arrears are received, claim relief on arrears of salary.

Understand Computation of Income under the Head Salaries

The head Salaries collects everything an employee earns from an employer because of the employment. You do not look at one item alone. You build the figure from many components and then reduce it by the few deductions the law allows.

The components fall in groups. First, basic salary, dearness allowance, bonus, commission, fees and leave encashment that are taxable. Second, allowances, some fully taxable, some exempt up to a limit. Third, perquisites, which are benefits in kind or amounts the employer pays on your behalf. Fourth, profits in lieu of salary and retirement benefits. Each has its own rules, which you study in the related topics. This topic is about putting them together in the right order.

After you get gross salary, you subtract the deductions allowed against salary. Under the default regime these are mainly the standard deduction and, where applicable, the employer's contribution to a notified pension scheme. Other deductions, such as professional tax, are linked to the older regime. Always read the question to see which regime it assumes. The result is income chargeable under the head Salaries.

Two special points are tested often. Tax paid by the employer: if the employer pays tax on your non-monetary perquisites, that tax is exempt in your hands. If the employer pays tax on your monetary salary, that tax is itself a taxable perquisite, so you gross up. Arrears of salary: salary of an earlier year received now is taxed in the year of receipt, which can push you into a higher slab. The law gives relief so that you do not pay more than you would have paid had the salary been received on time.

Key rules to remember

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.

How to solve Computation of Income under the Head Salaries questions

Use this order for any computation question on salary. It keeps the layout clean and earns step marks.

1Read the regime, the residential status and the tax year. Note whether the question asks for income under Salaries only or total tax too.
2Make a statement with columns for each component: basic, DA, bonus and commission, allowances, perquisites, profits in lieu of salary. Enter the taxable amount of each and show working below.
3For each allowance, write the full amount, the exempt part and the taxable part. For each perquisite, apply its valuation rule and write the taxable value.
4Treat employer-paid tax correctly: exempt for non-monetary perquisites, added as a perquisite for monetary salary.
5Total the taxable parts to get gross salary. Then subtract the standard deduction and other deductions allowed under the stated regime.
6State the net income under the head Salaries clearly. Items given in the question but ignored should carry a one-line reason.
7If arrears are received, compute tax with and without arrears for the year of receipt, then for the earlier year, and find the relief as A − B.
8Write the final answer with units in rupees and Indian grouping.

Quickest way: Component tick-off method

When to use it: Use it when a salary question lists many items and you have limited time in the 14-mark question.

List every figure given and tag it: T (fully taxable), E (fully exempt), P (partly taxable).
Settle P items first because they carry the working and the marks.
Total only the T and taxable P figures. Write the exempt items in a short line below with reasons.
Subtract the deduction for the stated regime once, at the end.
For arrears relief, set up two small slab calculations side by side: year of receipt and earlier year. Each is a with-and-without pair.

Common mistakes in Computation of Income under the Head Salaries

Deducting old-regime items such as professional tax or HRA exemption when the question uses the default regime.
Students remember the older salary layout and apply it automatically.
Fix: Write the regime at the top of your answer and check every deduction against it before you claim it.
Excluding the employer-paid tax on monetary salary, or adding the employer-paid tax on a non-monetary perquisite.
The two cases look alike and are reversed in treatment.
Fix: Ask if the benefit is cash salary or a benefit in kind. Cash salary: add the tax. Benefit in kind: exempt the tax.
Computing relief for arrears as tax on the arrears at a flat rate.
Students forget that relief compares tax in two different years.
Fix: Always compute four tax figures: receipt year with and without arrears, earlier year with and without arrears. Relief is the excess of A over B.
Including arrears in the earlier year's income to compute tax for that year but forgetting to add them to the receipt year.
Confusion about which year the arrears are taxed in.
Fix: Arrears are taxed in the year of receipt. The earlier year is used only to calculate relief.
Giving no working for exempt or ignored items.
Students think only the final figure matters.
Fix: Show each exempt figure and a one-line reason. Written answers earn marks for steps even when the final number differs.

Worked examples

Example 1

Mr Sharma works in a company in Pune. For the tax year 2026-27 he received: basic salary ₹8,00,000; dearness allowance ₹1,60,000; bonus ₹40,000; and the employer paid his residence electricity bill of ₹18,000, taken here as fully taxable. Compute income under the head Salaries, applying the default regime. Professional tax of ₹2,400 was paid by him.

Show the solution

Basic salary: ₹8,00,000 fully taxable.
Dearness allowance: ₹1,60,000 fully taxable.
Bonus: ₹40,000 taxable in the year of receipt.
Electricity bill paid by the employer: ₹18,000 taxable perquisite, as stated.
Gross salary = 8,00,000 + 1,60,000 + 40,000 + 18,000 = ₹10,18,000.
Standard deduction under the default regime = ₹75,000.
Professional tax paid by him ₹2,400 is not deducted under the default regime.
Net salary = 10,18,000 − 75,000 = ₹9,43,000.

Answer: Income chargeable under the head Salaries = ₹9,43,000.

Example 2

Ms Iyer received arrears of salary of ₹2,00,000 in the tax year 2026-27, relating to 2024-25. Her income under Salaries for 2026-27, including the arrears, is ₹14,00,000. Her total income for 2024-25 was ₹7,00,000 without the arrears. For simplicity, apply these slabs to both years and ignore cess and rebate: up to ₹4,00,000 nil; ₹4,00,001-8,00,000 5%; ₹8,00,001-12,00,000 10%; ₹12,00,001-16,00,000 15%. Compute the relief for arrears.

Show the solution

Tax on ₹14,00,000 (receipt year, with arrears): 20,000 + 40,000 + (2,00,000 × 15% = 30,000) = ₹90,000.
Tax on ₹12,00,000 (receipt year, without arrears): 20,000 + 40,000 = ₹60,000.
A = 90,000 − 60,000 = ₹30,000.
Earlier year with arrears: 7,00,000 + 2,00,000 = ₹9,00,000. Tax = 20,000 + (1,00,000 × 10% = 10,000) = ₹30,000.
Earlier year without arrears: ₹7,00,000. Tax = 3,00,000 × 5% = ₹15,000.
B = 30,000 − 15,000 = ₹15,000.
A is greater than B, so relief = A − B = 30,000 − 15,000 = ₹15,000.

Answer: Relief for arrears = ₹15,000, reducing her tax before cess.

Exam tips

Begin each answer by stating the regime and the tax year. It protects you from losing marks for choosing the wrong deductions.
Use a columnar statement with workings below. Examiners give marks for each component and each exempt reason.
In MCQs on employer-paid tax, decide first if the perquisite is monetary or non-monetary. That alone eliminates two options.
For arrears, set out the four tax figures in a small table-like list so the relief is easy to see. If A is not greater than B, write that no relief is available.
Do not leave out items that are exempt. A single line explaining why they are excluded shows the examiner you know the rule.

Practice questions from Salaries

Computation of Income under the Head Salaries in other exams

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

Computation of Income under the Head Salaries: frequently asked questions

How do I compute taxable salary step by step?

Add every taxable component: salary, bonus, taxable allowances, taxable perquisites and profits in lieu of salary. Then deduct the standard deduction and any other deduction allowed under the stated regime. The balance is income under the head Salaries.

Is tax paid by the employer on salary taxable?

Yes, if the employer pays tax on your monetary salary, that tax is a taxable perquisite and is added to your salary. If the employer pays tax on a non-monetary perquisite, that tax is exempt in your hands.

Which year are arrears of salary taxed in?

They are taxed in the year in which you receive them, not the year they relate to. The relief for arrears then reduces the extra tax caused by bunching the income in one year.

When is no relief for arrears available?

No relief arises when the extra tax in the year of receipt, A, is not more than the extra tax that would have been paid in the earlier year, B. Relief exists only when A is greater than B.