Introduction

Under the income tax act, the amount earned where there is an existence of the employer-employee relationship is taxable under the head “Salaries”. Salary includes wages, annuity, pension, gratuity, leave encashment, commission, advance salary, contribution to provident funds, contribution to the employee pension account, etc. Salary is taxable on receipt or accrual basis whichever is earlier.

The following amount is chargeable as salary in the Income Tax Return (ITR) during the year:

Salary is due from employer including former employer, whether paid or not.
Salary paid by the employer including former employer, whether due or not.
Arrears of salary paid by the employer including the former employer.

Components of Salary – Taxability or Exemptions

S.No.	Particulars	Taxability/Exemption
1	Basic Salary	Fully Taxable
2	Dearness Allowance (DA)	Fully Taxable
3	Bonus, Fees, or Commission	Fully Taxable
4	House Rent Allowance (HRA)	Fully Taxable unless the following conditions are satisfied: The least of the following is exempted: Actual HRA Received. 40% of Salary, 50% if the house is situated in Delhi, Chennai, Mumbai, or Kolkata. Rent paid less 10% of Salary Salary includes Basic Salary + DA + Commission based on turnover.
5	Children Education Allowance	Maximum Rs. 100 per month per child (Maximum 2 children) is exempt
6	Hostel Expenditure Allowance	Maximum Rs. 300 per month per child (Maximum 2 children) is exempt
7	Transport Allowance	Rs. 3200 per month is exempt provided the amount is paid to an employee who is blind or deaf and dumb or orthopedically handicapped with disability of lower extremities.
8	Transport Allowance paid to employee working in Transport Business Organisation	The least of the following is exempted: 70% of the allowance Rs. 10,000 per month
9	Conveyance Allowance to meet office traveling expenditure	Exempt to the extent of expenditure incurred for official purposes
10	Travelling Allowance to meet office travel or tour	Exempt to the extent of expenditure incurred for official purposes
11	Daily Allowance to meet ordinary daily charges	Exempt to the extent of expenditure incurred for official purposes
12	Helper/Assistance Allowance	Exempt to the extent of expenditure incurred for official purposes
13	Research Allowance	Exempt to the extent of expenditure incurred for official purposes
14	Uniform Allowance	Exempt to the extent of expenditure incurred for official purposes
15	Allowances or perquisites paid by the government to employees posted outside India.	Fully Exempt, the provided employee is an Indian citizen
16	Allowance to Judges of High/Supreme Court	Fully Exempt
17	Following allowances to Chairman/Member of UPSC: Value of rent-free official residence. Value of conveyance facilities including transport allowance. Sumptuary allowance Leave travel concession	Fully Exempt
18	Allowance paid by the UNO to its employees	Fully Exempt
19	Special Compensatory Allowance (Hilly Area)	Exemption varies from Rs. 300 to 7000 per month
20	Border area, Remote Locality or Disturbed Area or Difficult Area Allowance	Exemption varies from Rs. 200 to 1300 per month
21	Tribal area allowance in (a) Madhya Pradesh (b) Tamil Nadu (c) Uttar Pradesh (d) Karnataka (e) Tripura (f) Assam (g) West Bengal (h) Bihar (i) Orissa	Up to Rs. 200 per month is exempt
22	Compensatory Field Area Allowance	Up to Rs. 2600 per month is exempt
23	Compensatory Modified Area Allowance	Up to Rs. 1000 per month is exempt
24	Counter Insurgency Allowance	Up to Rs. 3900 per month is exempt
25	Underground Allowance to employees working in uncongenial, unnatural climate in underground mines	Up to Rs. 800 per month is exempt
26	High Altitude Allowance granted to armed forces operating in high altitude areas	Up to Rs. 1,060 per month (for altitude of 9,000 to 15,000 feet) is exempt Up to Rs. 1,600 per month (for altitude above 15,000 feet) is exempt
27	Highly active field area allowance granted to members of armed forces	Up to Rs. 4200 per month is exempt
28	Island Duty Allowance granted to members of armed forces in Andaman and Nicobar and Lakshadweep group of Island	Up to Rs. 3250 per month is exempt
29	City Compensatory Allowance	Fully Taxable
30	Fixed Medical Allowance	Fully Taxable
31	Tiffin, Lunch, Dinner, or Refreshment Allowance	Fully Taxable
32	Servant Allowance	Fully Taxable
33	Project Allowance	Fully Taxable
34	Overtime Allowance	Fully Taxable
35	Telephone Allowance	Fully Taxable
36	Holiday Allowance	Fully Taxable
37	Any Other Cash Allowance	Fully Taxable
38	Leave Travel Allowance – It Includes the amount paid by the employer for traveling within India with family. The family includes spouse, children (Maximum 2), and dependent brother/sister/parents	The exemption is available for the fare for traveling anywhere in India along with family twice in a block of 4 years.

Deduction from Salary

The following are the deductions available from the remaining taxable salary:

Standard Deduction: Rs. 50,000
Entertainment Allowance received by Government Employees:

The lowest of the following is deductible:

Rs. 5000
1/5th of salary
Actual entertainment allowance received

Professional Tax or Employment Tax: Amount paid is allowed as deduction.

Retirement Benefits

S.No.	Particulars	Exemption
1	Leave Encashment – Government Employees	Fully Exempt
2	Leave Encashment – Other than Government Employees	The least of the following is exempt: Amount received. Unutilized earned leave x Average monthly salary 10 months average salary Rs. 3,00,000
3	Retrenchment Compensation received by a workman under the Industrial Dispute Act, 1947	Least of the following shall be exempt from tax: The amount calculated as per section 25F(b)of the Industrial Disputes Act, 1947; Amount Received Rs. 5,00,000
4	Gratuity paid to Government Employees	Fully Exempt
5	Gratuity other than paid to Government Employees (covered under Gratuity Act, 1972)	The least of the following is exempt: (15/26) X has Last drawn salary X completed a year of service or part thereof more than 6 months. Rs. 20,00,000 Gratuity Received
6	Gratuity other than paid to Government Employees (not covered under Gratuity Act, 1972)	The least of the following is exempt: (1/2) X has Last drawn salary X completed year of service or part thereof over 6 months. Rs. 20,00,000 Gratuity Received
7	Pension received from UNO	Fully Exempt
8	Commuted Pension received by an employee of Central Government, State Government, Local Authority Employees, and Statutory Corporation	Fully Exempt
9	Commuted Pension received by other employees who also receive gratuity	1/3 of the full value of a commuted pension will be exempt from tax
10	Commuted Pension received by other employees who do not receive any gratuity	1/2 of the full value of the commuted pension will be exempt from tax
11	Family Pension received by the family members of Armed Forces	Fully Exempt
12	Family pension received other than above	Maximum of the following is exempted 1/3rd of Family Pension or 15,000
13	Voluntary Retirement	The least of the following is exempt from tax: The actual amount received as per the guidelines Rs. 5,00,000
14	Employee’s Provident Fund	Employer’s Contribution: Fully Exempt Employee’s Contribution: A deduction maximum of 1.5 Lakhs is available
15	National Pension Scheme	Any payment from the National Pension System Trust to an assesses on the closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed 60% of the total amount payable to him at the time of such closure or his opting out of the scheme.