Income from Salaries
This domain examines salary taxable on a due-or-received basis and the exemptions and perquisite valuations that convert gross salary into taxable salary.
Core rules
- Salary arises from an employer-employee relationship. It is taxed in the year it is due or received, whichever is earlier, with limited relief for advance salary and arrears under section 89.
- Salary includes basic pay, dearness allowance, bonus, commission, fees, pension, gratuity, leave encashment and profits in lieu of salary. Allowances are exempt only to the extent specified, such as HRA, leave travel concession and prescribed special allowances.
- HRA exemption is the least of actual HRA, rent paid minus 10% of salary, and 50% of salary in Delhi, Mumbai, Kolkata or Chennai (40% elsewhere). Salary for HRA means basic plus DA if terms include it plus commission as a percentage of turnover.
- Standard deduction is ₹50,000 under the old regime and ₹75,000 under the default new regime for AY 2025-26. Professional tax paid is deductible under the old regime.
- Perquisites are valued under prescribed rules; rent-free accommodation, motor car, interest-free loans and stock options are common exam items. Retirement benefits have separate limits and conditions.
Worked example
Basic pay is ₹6,00,000; HRA received ₹1,20,000; rent paid ₹1,80,000 in Mumbai. HRA exemption is least of ₹1,20,000; ₹1,80,000 − ₹60,000 = ₹1,20,000; and 50% of ₹6,00,000 = ₹3,00,000. Exemption is ₹1,20,000, so taxable HRA is nil. The reasoning changes if DA is included in salary terms or the city is non-metro.
Traps
Do not deduct rent paid unless HRA is received; do not include all DA in HRA salary; check metro status; tax perquisites even when no cash is paid; apply section 89 only to eligible arrears or advance salary.