Computation of Income from Salary – Format & Problems
Salary slip shows ₹60,000/month but taxable salary is different! Let's learn the exact computation format used by tax officers.
Standard Computation Format
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Step-by-Step Components
Step 1: Salary under Section 17(1)
Includes:
- Basic Salary: ₹XXX
- Dearness Allowance (DA) forming part of salary: ₹XXX
- Bonus: ₹XXX
- Commission: ₹XXX
- Fees: ₹XXX
- Advance salary: ₹XXX
Excludes:
- HRA (shown separately)
- Exempt allowances (shown after deduction)
Step 2: Allowances
Three types:
A. Fully Taxable (add to gross):
- City Compensatory Allowance
- Tiffin/Lunch Allowance
- Overtime Allowance
- Project Allowance
B. Fully Exempt (not included):
- Transport Allowance for specially-abled: ₹3,200/month
- Conveyance for official duty: Actual
- Foreign Allowance to govt employees
C. Partially Exempt (add gross, then deduct exempt part):
- HRA (House Rent Allowance)
- LTA (Leave Travel Allowance)
- CEA (Children Education Allowance)
Step 3: Perquisites Section 17(2)
Value of facilities provided by employer
Common Perquisites:
- Rent-free accommodation
- Motor car for personal use
- Domestic servant/sweeper/gardener/watchman
- Interest-free/concessional loan
- Free education to children
- Club membership
- Free meals
Valuation rules differ (covered in separate chapter)
Step 4: Profits in Lieu of Salary Section 17(3)
Payments on retirement/termination:
- Gratuity (partially exempt)
- Leave encashment (partially exempt)
- Compensation on termination (partially exempt)
- Payment from unrecognized provident fund
Detailed Example 1: Salaried Employee
Rajesh works at TCS, Mumbai. Details for FY 2023-24:
Salary Structure:
- Basic Salary: ₹6,00,000
- DA (part of salary): ₹1,80,000
- HRA received: ₹2,40,000
- City Compensatory Allowance: ₹30,000
- Medical Allowance: ₹20,000
- LTA received: ₹50,000
- Professional Tax paid: ₹2,400
Additional Info:
- Rent paid: ₹2,50,000 in Mumbai *LTA claimed: ₹30,000 (actual travel)
- Medical reimbursement: ₹20,000
Computation:
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HRA Exemption Calculation:
Least of:
- HRA received: ₹2,40,000
- Rent - 10% of salary: ₹2,50,000 - ₹78,000 = ₹1,72,000
- 50% of salary (metro): ₹3,90,000
Exempt: ₹1,72,000 Taxable HRA: ₹2,40,000 - ₹1,72,000 = ₹68,000
Note: Salary for HRA = Basic + DA = ₹7,80,000
Example 2: Government Employee
Mrs. Sharma (Govt Teacher, Pune):
Salary Details:
- Basic Pay: ₹4,00,000
- DA (50% not for retirement benefits): ₹2,00,000
- HRA: ₹1,20,000
- Entertainment Allowance: ₹12,000
- Professional Tax: ₹2,500
Rent paid: ₹1,10,000 (Pune)
Computation:
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HRA Exemption: Least of:
- ₹1,20,000
- ₹1,10,000 - ₹40,000 = ₹70,000
- 40% of ₹4,00,000 = ₹1,60,000
Exempt: ₹70,000
Entertainment Allowance (only for govt employees): Least of:
- Actual: ₹12,000
- ₹5,000
- 20% of basic: ₹80,000
Deductible: ₹5,000
Example 3: Perquisites Included
Mr. Khan (Director at Reliance):
Salary:
- Basic: ₹15,00,000
- Bonus: ₹3,00,000
Perquisites:
- Rent-free accommodation (Own house): ₹1,80,000
- Motor car (1.6L engine) for personal use: ₹21,600
- Domestic servant salary paid: ₹1,20,000
- Interest-free loan ₹10 lakh: ₹72,000 benefit
- Professional Tax: ₹2,500
Computation:
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Deductions under Section 16
1. Standard Deduction - Section 16(ia)
Amount: ₹50,000 (flat)
Conditions: None! Everyone gets it
History:
- Pre-2018: ₹40,000 (transport) + Medical reimbursement
- 2018: Abolished
- 2019: Brought back as ₹50,000
2. Entertainment Allowance - Section 16(ii)
Only for Government employees
Deduction: Least of:
- Actual entertainment allowance received
- ₹5,000
- 20% of basic salary
3. Professional/Employment Tax - Section 16(iii)
Actual amount paid to state government
Limit: Max ₹2,500 per year in most states
Practice Problem
You try!
Sneha (Software Engineer, Bangalore):
- Basic: ₹8,00,000
- DA: ₹2,00,000 (50% for retirement benefits)
- HRA: ₹3,00,000
- Bonus: ₹1,00,000
- Laptop provided (₹80,000 value): Free
- Professional Tax: ₹2,400
- Rent paid: ₹3,60,000
Calculate Income from Salary
Solution:
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HRA Calculation:
- Salary for HRA: ₹8,00,000 + ₹1,00,000 (50% of DA) = ₹9,00,000
- Least of:
- ₹3,00,000
- ₹3,60,000 - ₹90,000 = ₹2,70,000
- 50% of ₹9,00,000 = ₹4,50,000
- Exempt: ₹2,70,000
- Taxable HRA: ₹30,000
Note: Laptop for work = exempt perquisite (no taxable value)
Summary
- Format: Salary 17(1) + Allowances + Perquisites 17(2) + Profits in lieu 17(3) - Deductions 16 = Income from Salary
- Key Deductions: Standard deduction (₹50,000), Professional tax (actual), Entertainment (govt only, max ₹5,000)
- HRA exempt: Least of (actual, rent-10% salary, 50%/40% salary)
- Perquisites: Add taxable value (car, accommodation, loans)
- Always subtract: What is exempt from what is received (HRA, LTA, medical)
Quiz Time! 🎯
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Next Unit: Income from House Property! 🏠