Computation of Income under the head Income from “Salaries”

Income from salaries is taxable under Sections 15-17 of the Income Tax Act, 1961. It includes all remuneration received by an employee from an employer in cash or kind, along with certain allowances and perquisites. Below is a structured guide on how to compute taxable salary income.

1. Components of Salary Income [Section 17(1)]

Salary includes:

✔ Basic Salary

✔ Dearness Allowance (DA) (if part of retirement benefits)

✔ Bonus/Commission

✔ Allowances (partially or fully taxable)

✔ Perquisites (monetary value of non-cash benefits)

✔ Employer’s Contribution to PF > ₹7.5 lakh/year (new Rule 3B)

✔ Leave Encashment (taxable for private employees, exempt for govt. employees)

✔ Gratuity (taxable beyond exemption limit)

✔ Pension

2. Step-by-Step Computation of Taxable Salary

Step 1: Calculate Gross Salary

• | Special Allowances (Transport, Medical, etc.) | Exempt up to limits [Sec 10(14)] | Transport Allowance (₹1,600/month for disabled) |
• | Leave Travel Allowance (LTA) | Exempt for domestic travel (twice in 4 years) | Only travel cost, not accommodation |
• | Bonus/Commission | Fully Taxable | – |
• | Perquisites (Company Car, Rent-Free Accommodation, etc.) | Taxable as per valuation rules | – |

Step 2: Deduct Exemptions

• HRA Exemption(if applicable)
• LTA Exemption(for actual travel bills)
• Standard Deduction (₹50,000)(for all salaried employees)

Step 3: Add Perquisites (Non-Cash Benefits)

✔ Rent-Free Accommodation:

• Employees:License fee deducted from salary
• Private Employees:15% of salary (or actual rent paid by employer)

✔ Company Car:

• Personal Use:Taxable (₹2,400/month for petrol car)
• Official Use:Exempt

✔ Interest-Free/Concessional Loans:

• Taxable if loan > ₹20,000 (SBI rate – actual interest charged)

Step 4: Include Retirement Benefits (if received)

• | Leave Encashment| ₹25 lakh (lifetime) |
• | Pension| Fully taxable (if received) |

Step 5: Deduct Professional Tax (if paid, max ₹2,500/year)

Step 6: Final Taxable Salary = (Gross Salary – Exemptions + Perquisites – Standard Deduction – Professional Tax)

3. Tax Deducted at Source (TDS) on Salary

Employers deduct TDS under Section 192 based on:

✔ Taxable Salary (after exemptions)

✔ Employee’s Investment Declarations (80C, 80D, etc.)

✔ New vs. Old Tax Regime Choice

4. Key Changes (Budget 2024-25)

✔ Standard deduction increased to ₹75,000 (under new tax regime)

✔ No change in HRA/LTA exemptions

✔ Employer’s PF contribution > ₹7.5 lakh/year taxable (Rule 3B)

5. Example Calculation

Employee Details:

• Basic Salary: ₹10,00,000
• DA: ₹2,00,000
• HRA: ₹3,60,000 (Rent Paid: ₹4,80,000, Metro City)
• LTA: ₹40,000 (claimed for travel)
• Bonus: ₹1,00,000
• Employer’s PF Contribution: ₹1,20,000

Calculation:

1. Gross Salary= Basic + DA + HRA + LTA + Bonus = ₹10L + ₹2L + ₹3.6L + ₹40k + ₹1L = ₹17L
2. HRA Exemption= Least of:

• • Actual HRA (₹3.6L)
  • 50% of (Basic + DA) = ₹6L
  • Rent Paid – 10% of (Basic + DA) = ₹4.8L – ₹1.2L = ₹3.6L
    → Exempt HRA = ₹3.6L

3. Taxable Salary= ₹17L – ₹3.6L (HRA) – ₹40k (LTA) + ₹1.2L (PF > ₹7.5L) – ₹50k (Standard Deduction) = ₹13.3L