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CS Executive · Tax Laws and Practice · Income under the Head Salary

Under the Income-tax Act, 2025, an employer's deduction for contribution to a pension scheme for an employee is capped at 14% of the employee's salary for the tax year. For this purpose salary includes dearness allowance if the terms of employment so provide, and excludes all other allowances and perquisites. Annual figures for an employee of Sundaram Textiles Ltd: basic ₹6,00,000; dearness allowance (per terms of employment) ₹2,00,000; house rent allowance ₹1,50,000; special allowance ₹1,00,000. What is the maximum deduction available to the employer for this contribution?

The maximum deduction is ₹1,12,000. The 14% limit applies to basic salary plus dearness allowance, which here is ₹8,00,000, and excludes house rent and special allowances. Using basic alone or adding the other allowances gives wrong figures.

  1. A₹84,000
  2. B₹1,12,000Correct
  3. C₹1,33,000
  4. D₹1,47,000

Explanation

Salary for the limit is basic plus DA = 6,00,000 + 2,00,000 = ₹8,00,000. 14% of 8,00,000 = ₹1,12,000. ₹84,000 is 14% of basic alone, which ignores DA. ₹1,33,000 and ₹1,47,000 wrongly include HRA and special allowance.

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