Income from salary in Income Tax 

Are you a salaried individual who gets confused during the ITR filing season, especially about what exactly counts as “Income from Salary” in Income Tax? You’re not alone!

In this article, we simplify how to calculate income from salary for tax purposes. While “salary” might just mean your monthly paycheck to you, the Income Tax Act defines it differently under Section 17, including various components like allowances, perquisites, and more.

Understanding your salary structure, tax slab, and available deductions is key to choosing the right tax regime and saving money. Let’s break it down and help you file ITR smarter.

What is the Salary as per Section 17(1) of  Income Tax?

Section 17(1) of the Income Tax Act defines "salary" as any payment received by an employee from their employer—whether in cash, kind, or as a benefit. It’s a broad definition that includes not just your basic salary but also allowances, bonuses, commissions, perquisites, and even profits received in place of salary. Essentially, it covers nearly every form of compensation earned through employment.

What Is Considered Salary for Income Tax Purposes?

As mentioned, any payments made by an employer to an employee in cash, kind, or as a benefit can fall under the definition of salary. Here's what counts as salary for tax purposes:

1. Wages / Basic Salary

Any payment made for services rendered, such as basic pay, salary, or remuneration, including payments for paid leaves, is considered salary.

2. Annuity or Pension

• Annuity from a current employer is treated as salary.
• Annuity from a past employer is treated as profits in lieu of salary.
• Pension received after retirement also falls under this.

3. Profits in Lieu of Salary

These include:

• Compensation received upon termination or a change in job terms.
• Employer contributions and interest from unrecognised provident/superannuation funds.
• Payouts from Keyman Insurance policies.
• Payments received before joining or after leaving a job.

4. Gratuity

A lump-sum amount paid by an employer to recognise long-term service. It is governed by the Payment of Gratuity Act, 1972.

5. Fees and Commissions

Any fee or commission paid by the employer (like sales-based commissions) is included in salary.

6. Perquisites (Perks)

These are extra benefits given by the employer, either in cash or kind, such as:

• Rent-free accommodation
• Interest-free loans
• Club memberships
• Education expenses
• Insurance premium payments

7. Advance Salary

If you receive salary before it's actually due, it's called advance salary and is taxable in the year you receive it.

8. Leave Encashment

When employers pay for unused leave—either during service or after retirement—it is treated as salary.

9. Employer’s Contribution to EPF

If your employer contributes more than 12% of your salary to your provident fund, or if the interest earned is higher than the notified rate (e.g., 8.25% in FY 2023–24), the excess amount is taxable as salary.

10. Transfer from Unrecognised to Recognised PF

Any taxable amount transferred from an unrecognised to a recognised provident fund becomes part of your salary.

11. Contributions to National Pension Scheme (NPS)

Employer contributions to NPS on your behalf are also considered part of your salary.

Still Confused about how Income from Salary is taxed? Let IndiaFilings’ tax experts clear the confusion and help you save!  

Get Started!

Components of Salary in Income Tax 

Salary in Income Tax is made up of various components such as basic salary, allowances, perquisites, bonuses, and retirement benefits, each with its own tax implications.

Basic Salary

Basic salary is the core part of your total salary package. It’s a fixed amount paid before any extras like bonuses, allowances, or deductions. Many other salary components, such as House Rent Allowance (HRA) and Provident Fund (PF), are calculated as a percentage of the basic salary. Typically, it makes up a significant portion of your overall salary.

House Rent Allowance (HRA)

If you're a salaried employee living in a rented home, you can claim House Rent Allowance (HRA) to reduce your taxable income. Depending on your situation, this exemption can be partial or full. However, the Income Tax Act lays out a specific formula for how much HRA you can actually claim.

Keep in mind:

• If you receive HRA but don’t pay rent, the entire HRA is fully taxable.
• Under the new tax regime, HRA exemption is not allowed.

Example 1: Ayesha’s Case – Paying Rent to Her Brother

Ayesha works for a finance company in Mumbai and receives HRA as part of her salary. She currently lives in a flat owned by her elder brother.

Even though she doesn’t pay rent to an external landlord, Ayesha can still claim HRA exemption by paying rent to her brother, provided:

• She signs a rental agreement with her brother.
• She pays rent regularly through bank transfers or cheques.
• Her brother includes the rent as income from house property in his income tax return.

Smart Tip: This setup helps Ayesha reduce her taxable income through HRA exemption, and at the same time, her brother can claim deductions like municipal taxes and 30% standard deduction on rental income.

Example 2: Rohan’s Case – Living in a Rented Apartment

Rohan is a software engineer in Pune who earns a monthly salary that includes an HRA component. He pays ₹20,000 per month as rent for an apartment.

Since Rohan actually lives in a rented home, he is eligible to claim an HRA exemption on his income tax.

Here’s how it works:

To calculate his HRA exemption, the least of the following three amounts will be exempt from tax:

• The actual HRA received from his employer.
• 50% of his basic salary (since he lives in a metro city like Pune, 40% for non-metros).
• Rent paid minus 10% of the basic salary.

Tip: By submitting rent receipts and landlord details, Rohan can claim a deduction and reduce his taxable salary income.

Leave Travel Allowance (LTA)

Salaried employees can claim an exemption on their Leave Travel Allowance (LTA) for a trip taken within India. However, the exemption is limited to the shortest distance travelled for the trip.

LTA can only be claimed for travel with immediate family members, including your spouse, children, and parents. Travel with other relatives is not eligible for this exemption.

The exemption amount is restricted to the actual expenses incurred on the trip. To claim LTA, you must submit the relevant bills and receipts to your employer. Only when you actually take the trip and incur eligible travel expenses can you benefit from this exemption.

Bonus

• A bonus is typically paid once or twice a year and can go by various names, such as performance incentive or variable pay. Regardless of what it is called, the entire amount is fully taxable.
• The performance bonus is usually tied to your appraisal ratings or the performance you demonstrate over a specific period, and it is determined according to the company's policy.

Employee Contribution to Provident Fund (PF)

The Provident Fund (PF) is a retirement benefit scheme introduced by the Government of India to ensure social security for employees. As per the Employees' Provident Funds (EPF) Act, 1952, companies with over 20 employees must provide PF benefits.

Both the employer and employee contribute 12% of the employee's basic salary every month towards the provident fund and pension scheme.

The current interest rate for PF is 8.25%, though it remains subject to change. Additionally, for taxable withdrawals from the EPF, the TDS rate is 20% for individuals who do not provide a PAN card.

Standard Deduction

Standard deduction is a fixed amount that can be deducted from your salary income, without any conditions or requirements.

Currently, under the old tax regime, a standard deduction of Rs. 50,000 is available. Under the new tax regime (Section 115 BAC), the standard deduction has been increased to Rs. 75,000.

Professional Tax

Professional tax is a state-level tax imposed on income earned through employment, similar to how income tax is levied by the central government. Each state sets its own rate, but it cannot exceed Rs. 2,500 per year.

Employers typically deduct this tax from your salary and deposit it with the state government. Under the old tax regime, you could claim professional tax as a deduction from your salary income in your income tax return.

Difference Between Take-Home Salary and CTC

When you receive a job offer, the total figure quoted is usually your CTC (Cost to Company). However, your take-home salary—the actual amount that hits your bank account each month—is usually quite different.

What is CTC?

CTC includes everything the company spends on you in a year. This isn't just your monthly salary—it also includes benefits like:

• Employer’s contribution to the Provident Fund
• Gratuity
• Medical insurance premiums
• Office perks (cab services, food coupons, etc.)
• Performance bonus or incentives

Let’s understand this with a new example:

Example: CTC Breakdown

This is what will be mentioned in your offer letter as your annual package.

What is Take-Home Salary?

Take-home salary is what you receive after all mandatory deductions. These deductions typically include:

• Employee’s contribution to PF
• Tax deducted at source (TDS)
• Professional tax (if applicable)
• Insurance premiums

Let’s say in this example:

Annual Take-Home ≈ ₹39,600 × 12 = ₹4,75,200

Key Differences

CTC is the total package, but take-home is the real money you get to spend. Always evaluate your deductions to understand your actual income.

Taxability of Retirement Benefits under Salary Income

In addition to your regular salary, retirement benefits also play a crucial role in your financial planning. Let’s take a look at how these benefits are taxed under salary income  

Exemption of Leave Encashment

Leave encashment refers to the payment received for unused leave days, either on retirement or resignation. This amount is considered a part of your salary income and is taxable, unless exempted under certain conditions.

Employer Policies

• Check your employer's policy regarding leave encashment:
• Some allow you to carry forward and encash unused leave.
• Others may require you to use your leave within the year, with no encashment.

Tax Exemption Rules

• For Central and State Government employees: Leave encashment is fully exempt from tax.
• For Non-Government (Private Sector) employees: The exemption is limited to the least of the following:
• 10 months' average salary prior to retirement/resignation(Only includes basic salary + dearness allowance; excludes other allowances and perks)
• Actual leave encashment received
• Salary for earned leave, based on a maximum of 30 days per year of service
• ₹25,00,000 (lifetime limit)

Note: If you receive leave encashment from more than one employer in a financial year, the total exemption across employers cannot exceed ₹25,00,000. This exemption is available under both the old and new tax regimes.

Tax Relief on Arrears or Advance Salary (Section 89(1))

If you receive a portion of your salary or family pension in arrears or advance, you may be eligible for tax relief under Section 89(1). This provision helps reduce the extra tax burden caused by income being taxed in a lump sum. 

How to Calculate the Relief

1. Calculate tax on total income (including the arrears/advance) in the year it is received. 
2. Calculate tax on total income (excluding the arrears/advance) for the same year.
3. Find the difference between Step 1 and Step 2.
4. Calculate tax on income (excluding the arrears) for the year(s) to which the arrears actually relate.
5. Calculate tax on income (including the arrears) for the relevant past year(s).
6. Find the difference between Step 5 and Step 4.
7. The excess of Step 3 over Step 6 is the amount of relief under Section 89(1) that can be claimed.

Note: If the difference in Step 6 is more than in Step 3, no relief will be available.

Tax Exemption on Voluntary Retirement Compensation – Section 10(10C)

If you receive compensation due to voluntary retirement or separation, you may be eligible for a tax exemption under Section 10(10C).

• Maximum exemption allowed: ₹5,00,000
• This benefit applies only once and only in the year you receive the compensation.

Eligibility Conditions

To claim this exemption, the following criteria must be met:

• You must be employed with:
• A Central or State Government body
• A local authority
• A university, IIT, or a recognised institute of national importance
• A notified management institute
• A public sector company (PSU), a cooperative society, or any other company

The retirement scheme must comply with the guidelines laid down in Rule 2ba of the Income Tax Rules.

Important Notes

• This exemption cannot be claimed if you have already availed tax relief under Section 89 by treating the compensation as arrears of salary.
• The exemption is applicable only in the assessment year in which the amount is received—carry forward is not allowed.

Pension – Taxability and Exemptions

Pension is considered taxable under the "Salaries" head when filing your income tax return. Typically, it is paid out on a monthly basis, although there is an option to receive it as a lump sum (referred to as commuted pension) instead of periodic payments.

What is Commuted Pension?

At the time of retirement, you may opt to receive a portion of your pension in advance. This upfront pension payment is known as a commuted pension.

Taxation of Commuted and Uncommuted Pension

• Uncommuted Pension (any monthly or periodic pension) is fully taxable as salary. In the above example, the ₹9,000 received monthly is fully taxable.
• Commuted Pension: For government employees, the entire commuted pension is exempt from tax. For non-government employees, the commuted pension is partially exempt.

Exemption on Commuted Pension

For government employees, the entire commuted pension is exempt from tax.

• For non-government employees, the following exemptions apply:
• If gratuity is also received along with the pension, 1/3rd of the total pension is exempt, and the remainder is taxable.
•  If only a pension is received (without gratuity), ½ of the total pension is exempt.

Taxation of Family Members' Pension

Pension received by a family member is taxed under the head “Income from Other Sources”. If the pension is paid as a lump sum, it is not taxable. However:

• Pension received by family members of the Armed Forces or from the United Nations is exempt from tax.
• If a monthly pension is received by a family member, the lesser of ₹15,000 or 1/3rd of the pension is exempt from tax.

Pension Deduction under the New Tax Regime

Under the new tax regime, a pension deduction of 1/3rd of the pension received is allowed, subject to a maximum of ₹25,000.

Gratuity – Tax Exemption and Calculation

Gratuity is a retirement benefit provided by employers to employees. An employee becomes eligible for gratuity after completing five years of continuous service with the employer. Gratuity is typically paid upon retirement or resignation.

Tax Exemption for Government Employees

For central, state, or local government employees, gratuity received upon retirement or death is fully exempt from tax for the employee or their family.

Tax Exemption Rules for Non-Government Employees

Tax Exemption Based on Employer Coverage under the Payment of Gratuity Act

The tax treatment of your gratuity depends on whether your employer is covered by the Payment of Gratuity Act. You should check with your employer to determine if this applies.

If your employer is covered by the Payment of Gratuity Act, the least of the following three is exempt from tax:

• 15 days’ salary based on the last drawn salary for each completed year of service. If a part of the year is served, it is considered a completed year if more than 6 months are worked. Any period of service less than 6 months will be ignored.
• Rs 20,00,000 (maximum exemption limit).
• Gratuity received.

If your employer is not covered under the Payment of Gratuity Act, the least of the following three is exempt from tax:

• Half a month’s salary for each completed year of service. In this case, any fractional year of service is ignored.
• Rs 20,00,000 (maximum exemption limit).
• Gratuity actually received.

Note: For example, if you have worked for 14 years and 9 months, your total years of service will be considered as 14 years. The salary used for calculating gratuity will be the average salary of the last 10 months before your retirement month.

Understanding Salary Income and Other Taxable Income Sources

Now that we’ve covered the basics of salary income in Income Tax, let’s dive deeper into the different types of income that contribute to your overall taxable income.  Your total income is not just limited to your salary; it can include various other sources of income. According to the Income Tax Department, your overall income includes income from multiple heads, such as house property, capital gains, business or profession, and income from other sources. All of these different income types contribute to your gross income.

Income from Salary

This is the money you receive for your services under an employment contract. It includes basic salary, bonuses, allowances, and other perks received as part of your job.

Income from House Property

This refers to income earned from property you own, which could be either self-occupied or rented out. If you rent out property, the rental income is taxable, but there are exemptions like the standard deduction on rental income.

Income from Business and Profession

This income arises from carrying on a business or profession. For example, if you are a freelancer or run a business, the profit or loss from your activities falls under this head.

Income from Capital Gains

This includes income earned from the sale of capital assets, such as shares, mutual funds, real estate, jewellery, or any other valuable assets. The profit from the sale of such assets is taxable as capital gains.

Income from Other Sources

This category includes income that doesn’t fall under any of the other heads. Examples include income from interest on savings accounts or fixed deposits, lottery winnings, or any other miscellaneous sources of income.

These various income sources are summed up to determine your gross income.

Tax Rates

To calculate your tax liability, start by adding up all your income from various sources, which forms your gross total income. From this, you can claim deductions under Chapter VI-A (such as under Sections 80C, 80D, etc.). The remaining amount is your taxable income, on which tax will be calculated based on the applicable tax rates.

You can easily determine your tax refund or dues for the year using ClearTax's app. Download it to calculate your taxes with ease.

Income Tax Rates for Taxpayers Under 60 Years of Age for FY 2024-25

Old Tax Regime (FY 2024-25)

New Tax Regime (FY 2024-25)

Click here to know more about  Old Regime vs New Regime: Which is Better for You? 

Cess

For FY 2024-25, a Health and Education Cess of 4% is applicable on the total income tax and surcharge amount.

Basic Exemption Limits for Senior Citizens (Old Regime)

• For Senior Citizens (aged 60 years or more but less than 80 years), the basic exemption limit for FY 2024-25 is Rs. 3,00,000.
• For Super Senior Citizens (aged 80 years or more), the basic exemption limit for FY 2024-25 is Rs. 5,00,000.

TDS on Salary

TDS (Tax Deducted at Source) is the tax that is deducted from your salary by your employer every month and paid directly to the income tax department on your behalf. Based on your estimated salary for the entire year and any tax-saving investments you’ve made, your employer calculates your tax liability and determines how much TDS needs to be deducted from your monthly salary.

For most salaried employees, TDS is a significant portion of their overall income tax payment. You will receive a TDS certificate, known as Form 16, from your employer, typically around June or July. This certificate details the total tax that has been deducted from your salary during the year.

In addition, your bank may also deduct TDS on interest earned from fixed deposits (FDs). The usual TDS rate for FDs is 10%, provided the bank has your PAN. If the bank does not have your PAN details, the TDS rate is 20%.

Form 16

Form 16 is a TDS certificate issued by your employer, confirming the amount of tax deducted at source (TDS) from your salary and remitted to the government. It is mandated by the Income Tax Department for all employers to deduct TDS and deposit it with the government.

Form 16 consists of two parts:

• Part A: Includes details such as the names and addresses of the employer and employee, as well as PAN and TAN information, and the TDS deductions made.
• Part B: Contains information about the salary paid, other income, eligible deductions, and the total tax payable.

Did you know? You can use Form 16 to e-file your income tax returns on IndiaFilings!

Get Started!

Form 26AS

Form 26AS is a summary of all taxes deducted on your behalf, as well as taxes paid by you. It is provided by the Income Tax Department and shows details such as:

• Taxes deducted by various deductors on your behalf
• Tax deposits made by you
• Tax refunds received in the financial year

Annual Information Statement (AIS)

The Annual Information Statement (AIS) provides a comprehensive summary of all your financial transactions reported to the Income Tax Department. It includes information like:

• Income from salary, interest on savings accounts, fixed deposits, and recurring deposits
• Capital gains from the sale of mutual funds or stocks
• Sale of immovable property (as reported by the sub-registrar)
• Purchases of fixed deposits, mutual funds, stocks, or immovable property
• Foreign remittances
• Cash deposits exceeding Rs. 10 lakhs in a year
• Credit card payments exceeding Rs. 10 lakhs in a year
• Tax payment details (self-assessment tax, advance tax)
• Tax refund details

It’s crucial to verify the details in Form 26AS and AIS before filing your income tax return. Any discrepancies between these forms and your Income Tax Return (ITR) could result in a notice from the tax department.

Deductions

The lower your taxable income, the lower your tax liability. Be sure to claim all applicable tax deductions and benefits to minimise your tax burden. Under Section 80C of the Income Tax Act, you can reduce your taxable income by up to Rs. 1.5 lakh. Additionally, there are various other deductions available under sections like 80D, 80E, 80GG, 80U, etc., which can further lower your tax liability.

How is Salary Income Taxed? Basis of Charge and Place of Accrual

1. Basis of Charge – Section 15 of the Income Tax Act

Salary is taxed on the earlier of the due or receipt basis. This means the salary becomes taxable when: 

• It is received in advance (before it is actually due). 
• It becomes due to the employee, whether paid or not. 
• Arrears of salary are paid during the year, but were not taxed earlier.

2. Where Does Salary Accrue? – Understanding the Place of Accrual

The place of accrual determines if salary is taxable in India:

• Services Rendered in India: If the work is done in India, the salary is taxable in India, no matter where it is paid or the employee’s residency status. 
• Resident vs. Non-Resident:
  • Residents pay tax on global income, including salary earned abroad.
  • Non-residents are taxed only on income earned or accrued in India.
• Salary Paid Outside India for Work Done in India: If a non-resident gets paid abroad but performs services in India, that salary is still taxable in India.
• DTAA Provisions (Tax Treaties): If India has a Double Taxation Avoidance Agreement (DTAA) with another country, those rules may override domestic tax laws, potentially offering relief from being taxed twice.

Conclusion

Navigating the income tax landscape as a salaried individual doesn't have to be overwhelming. By understanding what truly constitutes "income from salary"—from basic pay and allowances to perquisites and retirement benefits—you can file your taxes more confidently and efficiently. Knowing the tax treatment of each component and staying informed about available deductions helps you make smarter financial choices. Whether you're choosing between old and new regimes or planning your salary structure, a little knowledge can go a long way in optimising your tax liability and boosting your savings.

Need help filing your Income Tax Return?

Don’t let tax season stress you out. Whether you're choosing the right regime, calculating exemptions, or just want to make sure everything’s accurate, IndiaFilings is here to help.

File your ITR with IndiaFilings now and experience hassle-free tax filing, expert guidance, and complete peace of mind!

Get Started!

About the Author