Income from Salaries
What this domain tests
This domain tests the charge on salary, the treatment of allowances and perquisites, retirement benefits, and the deductions available from salary. You must know when salary is taxed and how each component is valued or exempted.
Core rules
- Salary is taxable on a due or receipt basis, whichever is earlier. Advance salary is taxed when received; arrears are taxed when received if not taxed earlier.
- Salary includes wages, basic pay, dearness allowance, bonus, commission, fees, advance salary, and profits in lieu of salary. Perquisites and employer contributions to recognised provident fund are also covered.
- House rent allowance exemption, available only under the old regime, is the least of: actual HRA received; 50% of salary for Delhi, Mumbai, Kolkata, or Chennai (40% elsewhere); and rent paid minus 10% of salary. Salary here means basic pay plus DA forming part of retirement benefits plus commission on sales.
- Standard deduction: ₹50,000 under the old regime and ₹75,000 under the new regime for AY 2025-26. Professional tax paid is deductible under the old regime. Entertainment allowance is deductible only for government employees, subject to limits.
- Gratuity, leave encashment, and approved PF receipts have separate exemption limits and conditions.
Worked example
An employee has basic pay of ₹6,00,000, DA of ₹1,20,000 (forming part of retirement benefits), and HRA of ₹1,80,000. He pays rent of ₹2,40,000 in Bhubaneswar. Salary for HRA = ₹7,20,000. Exemption = least of ₹1,80,000; 40% of ₹7,20,000 = ₹2,88,000; and ₹2,40,000 − ₹72,000 = ₹1,68,000. HRA exemption = ₹1,68,000. The taxable HRA is ₹12,000. Reasoning: compare all three figures and take the lowest, not the actual rent.
Traps
HRA exemption is not available under the new regime. Do not use total salary including all allowances for the 10% test. Standard deduction is not available against other heads. Reimbursement of actual business expenses is not automatically taxable.