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.

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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

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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:

HRA Exemption Calculation:

Least of:

1. HRA received: ₹2,40,000
2. Rent - 10% of salary: ₹2,50,000 - ₹78,000 = ₹1,72,000
3. 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

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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:

HRA Exemption: Least of:

1. ₹1,20,000
2. ₹1,10,000 - ₹40,000 = ₹70,000
3. 40% of ₹4,00,000 = ₹1,60,000

Exempt: ₹70,000

Entertainment Allowance (only for govt employees): Least of:

1. Actual: ₹12,000
2. ₹5,000
3. 20% of basic: ₹80,000

Deductible: ₹5,000

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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

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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:

HRA Calculation:

• Salary for HRA: ₹8,00,000 + ₹1,00,000 (50% of DA) = ₹9,00,000
• Least of:
  1. ₹3,00,000
  2. ₹3,60,000 - ₹90,000 = ₹2,70,000
  3. 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)

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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)

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Quiz Time! 🎯

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Next Unit: Income from House Property! 🏠