Tax Laws and Practice · Income under the Head Salary

Deductions from Salary and Computation of Taxable Salary

Updated 11 October 2026 · Fact-checked

Taxable salary is gross salary (salary, allowances and perquisites that are taxable) minus the deductions the Act allows: standard deduction, and under the old regime entertainment allowance (government employees) and professional tax. Add up taxable items first, subtract deductions in order, and claim arrears relief separately on application under section 157.

Understand Deductions from Salary and Computation of Taxable Salary

Income under the head Salary is worked out in two stages. First you find gross salary: basic pay, dearness allowance, bonus, taxable allowances, taxable perquisites, and any taxable retirement benefits. Exempt items are left out at this stage. Then you subtract the deductions that the Income-tax Act, 2025 permits from salary. What is left is net taxable salary, which goes into total income.

The deductions are few. The standard deduction is a flat amount allowed to every salaried person, limited to the salary actually received. Entertainment allowance is deductible only for government employees, and only up to a cap. Professional tax is deductible if it was actually paid in the year. Entertainment allowance and professional tax are available only under the old regime. Under the new regime, which is the default regime, only the standard deduction is allowed, and at a higher amount. Check the current amounts against the Finance Act, 2026 in your study material before the exam.

Arrears of salary create a different problem. If you receive several years of pay in one year, the lump sum can push you into a higher slab. Section 157 of the Income-tax Act, 2025 deals with this. Where total income is assessed at a higher rate because of arrear or advance salary, salary for more than twelve months in one tax year, a payment in the nature of profits in lieu of salary under section 18(1), or arrears of family pension (defined in section 93(1)(d)), the Assessing Officer grants relief on the assessee's application, as prescribed.

Section 157(2) adds a guard. No relief is given on any income for which the assessee has already claimed a deduction under the table in section 19(1). You cannot get a deduction and relief on the same amount.

For CS Executive, the examiner wants a clean computation with each item shown, the regime stated, and the reason for each limit.

Key rules to remember

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.

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

Use this order for any salary computation question. It keeps exempt items, deductions and relief apart, which is where marks are lost.

1Note the person's status (government or non-government employee) and the regime, old or new. If the question is silent, state your assumption.
2List every receipt: basic, DA, bonus, commission, allowances, perquisites, retirement benefits. Mark each as taxable, partly taxable or exempt.
3Add the taxable amounts to get gross taxable salary. Show exempt amounts separately, not in the total.
4Compute the standard deduction and cap it at the salary received.
5If the old regime applies, compute entertainment allowance (government employees only) using the lowest-of-three test, then professional tax paid.
6Subtract all deductions from gross salary to get net taxable salary. Show each deduction on its own line.
7If arrears, advance salary or similar receipts are present, compute section 157 relief separately using steps A and B. Show it as relief against tax, not as a deduction from salary.
8Write a one-line conclusion giving net taxable salary and, where relevant, the relief.

Quickest way: Three-line salary computation

When to use it: Use this when the question has many components and you have limited time. It works for straightforward computation problems.

Line 1: write Gross taxable salary and total the taxable items only, dropping exempt ones as you read.
Line 2: write Less: deductions with standard deduction first, then entertainment allowance and professional tax only if old regime.
Line 3: write Net taxable salary. For arrears, draw a small box and compute A − B separately.
Before moving on, check two things: is entertainment allowance claimed by a government employee, and is the standard deduction within the salary?

Common mistakes in Deductions from Salary and Computation of Taxable Salary

Deducting entertainment allowance for a private-sector employee
Students remember the formula but forget it applies only to government employees.
Fix: Read the employer type first. If it is not government, skip the deduction and say so in one line.
Claiming professional tax and entertainment allowance under the new regime
Students apply old-regime deductions to every problem.
Fix: Decide the regime before computing deductions. Under the new regime, only the standard deduction is allowed.
Using basic plus DA for the 1/5 limit on entertainment allowance
Students treat 'salary' and 'basic salary' as the same thing.
Fix: Use basic salary only, unless the question says DA forms part of pay for retirement benefits.
Treating arrears relief as a deduction from salary
The relief is linked to salary, so students subtract it from income.
Fix: Section 157 relief is worked out on tax and given against tax payable on the assessee's application. Do not reduce salary income by it.
Giving relief when A is not more than B
Students stop after computing the difference and write it down as relief.
Fix: Relief is allowed only when the tax under step A is more than the tax under step B. Otherwise the relief is nil.
Letting the standard deduction exceed the salary
Students subtract the full fixed amount without comparing.
Fix: Always take the lower of the fixed amount and the salary received.

Worked examples

Example 1

Rajesh Nair is a government employee. Under the old regime, for the tax year he received basic salary ₹4,80,000, dearness allowance ₹1,92,000 (not part of pay for retirement benefits), and entertainment allowance ₹12,000. He paid professional tax of ₹2,500. Compute his net taxable salary. Assume the standard deduction is ₹50,000.

Show the solution

Gross salary = 4,80,000 + 1,92,000 + 12,000 = ₹6,84,000.
Entertainment allowance is allowed to government employees. Test: (1) allowance received ₹12,000; (2) 1/5 of basic = 4,80,000 ÷ 5 = ₹96,000; (3) fixed cap ₹5,000. Lowest is ₹5,000.
Standard deduction = lower of ₹50,000 and salary, so ₹50,000.
Professional tax paid = ₹2,500, allowed under the old regime.
Total deductions = 5,000 + 50,000 + 2,500 = ₹57,500.
Net taxable salary = 6,84,000 − 57,500 = ₹6,26,500.

Answer: Net taxable salary is ₹6,26,500.

Example 2

Meera Iyer received arrear salary of ₹3,00,000 this year, relating to an earlier year. Tax on her total income of this year including the arrears is ₹1,80,000, and excluding the arrears is ₹1,20,000. Tax on her total income of the earlier year including the arrears is ₹40,000, and excluding the arrears is ₹25,000. Compute the relief for arrears of salary, assuming she applies for it.

Show the solution

Provision: under section 157 of the Income-tax Act, 2025, where arrear or advance salary causes total income to be assessed at a higher rate, the Assessing Officer grants relief on the assessee's application, as prescribed.
Step A: extra tax in the current year = 1,80,000 − 1,20,000 = ₹60,000.
Step B: extra tax if arrears were taxed in the earlier year = 40,000 − 25,000 = ₹15,000.
Relief = A − B = 60,000 − 15,000 = ₹45,000. A is more than B, so relief is allowed.
Conclusion: the relief is given against tax payable, not as a deduction from salary income.

Answer: Relief under section 157 is ₹45,000, granted on her application.

Exam tips

Write the regime at the top of the answer. It decides which deductions you may use and earns you the first mark even if the question is silent.
Show the lowest-of-three test for entertainment allowance line by line. Examiners award marks for the working, not only the final figure.
For arrears, set out the A and B boxes clearly. If tax figures are given in the question, do not recompute them.
Cite section 157 when you present arrears relief and mention that it needs an application. Keep the conclusion to one clear sentence.
If a question asks about both regimes, prepare two short columns for gross salary and deductions, and compare the net figures at the end.

Practice questions from Income under the Head Salary

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 from salary under the new Income-tax Act?

It is a flat deduction allowed to salaried persons from their salary income, limited to the salary actually received. The amount differs between the old regime (₹50,000) and the new regime (₹75,000). Confirm the figures for the tax year in your study material.

Can I claim professional tax under the new regime?

No. Under the new regime only the standard deduction is allowed from salary. Professional tax and entertainment allowance can be deducted only under the old regime.

Who can claim the entertainment allowance deduction?

Only government employees, and only under the old regime. The deduction is the lowest of the allowance received, one-fifth of basic salary and ₹5,000.

How is relief for arrears of salary calculated?

Work out the extra tax caused by adding arrears to the current year, then the extra tax if they had been added to the year they relate to. The relief is the first minus the second, if positive. It is granted on application under section 157.

Does section 157 relief apply only to arrears of salary?

No. It also covers advance salary, salary for more than twelve months in one tax year, profits in lieu of salary under section 18(1), and arrears of family pension as defined in section 93(1)(d).