Legal Reference
Section 17(1) (salary definition), Section 17(2) (perquisites), Section 17(3) (profits in lieu), Section 16 (standard deduction), Section 89 (relief arrears), ITA 2025
1. What is Salary Income?
Salary under Section 17(1) of ITA 2025 is broadly defined to include: wages, annuity, pension, gratuity, fees, commissions, perquisites, profits in lieu of salary, advance salary, and any payment from an employer. The key test is employer-employee relationship — income from contract or freelance does not qualify as salary.
2. Components of Gross Salary
| Component | Taxable? | Notes |
|---|
| Basic salary | Fully taxable | Base for HRA, PF, NPS calculations |
| Dearness Allowance (DA) | Fully taxable | Part of "salary" for HRA and PF purposes |
| HRA (House Rent Allowance) | Partly exempt | Exempt portion computed per Rule 2A (old regime only) |
| Leave Travel Allowance (LTA) | Partly exempt | Actual travel cost exempt twice in 4-year block |
| Special allowance | Fully taxable | No exemption available |
| Bonus | Fully taxable | Taxable in year of receipt |
| Perquisites | Valued per Rule 3 | Car, accommodation, ESOP etc. |
| Employer PF (above Rs 7,500/month) | Taxable excess | Employer PF above 12% of salary taxable |
3. Standard Deduction: Rs 75,000
All salaried employees and pensioners get a standard deduction of Rs 75,000 from gross salary — in both old and new regimes. No proof required. This replaced the earlier Rs 40,000 (raised to Rs 50,000, then Rs 75,000 by Budget 2024). The standard deduction is applied before computing taxable salary.
4. HRA Exemption Computation (Old Regime)
HRA exemption is the LOWEST of three:
- Actual HRA received from employer
- Actual rent paid minus 10% of (Basic + DA)
- 50% of (Basic + DA) for metro cities (Mumbai, Delhi, Kolkata, Chennai); 40% for non-metro
If you live in your own house or do not pay rent — HRA is fully taxable. Landlord PAN must be submitted if rent exceeds Rs 1 lakh per year.
5. Salary vs Retirement Benefits: Different Tax
| Item | Tax Treatment |
|---|
| Gratuity | Exempt up to Rs 20L (non-govt) |
| Leave encashment (at retirement) | Exempt up to Rs 25L (non-govt) |
| VRS compensation | Exempt up to Rs 5L |
| Commuted pension (non-govt with gratuity) | 1/3 exempt |
| Uncommuted pension | Fully taxable |
6. Salary Received from Two Employers
If two salaries are received in the same year (previous job + new job), both are taxable in the same year. Each employer deducts TDS independently unless the employee submits Form 12B to the new employer. File ITR-2 or ITR-3 (not ITR-1) since ITR-1 requires only one employer Form 16. Disclose both Form 16s in the ITR.
7. Why TaxClue
Salary computation — especially with multiple employers, retirement benefits, and perquisites — requires careful reconciliation with Form 16. TaxClue handles all salaried ITR filings. Contact us under ITA 2025.
Disclaimer
This article is for general informational and educational purposes only. It does not constitute legal, financial, or professional tax advice. Readers are advised to consult a qualified Chartered Accountant or tax professional before making any decisions. TaxClue Consultech Pvt Ltd accepts no liability. All case studies and examples in this article are illustrative only and do not represent actual persons or transactions.
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❓ Frequently Asked Questions
What is the standard deduction on salary?
Under ITA 2025, all salaried employees and pensioners get a standard deduction of Rs 75,000 from gross salary — available in both old and new tax regimes. No documentation is required. This automatic deduction was increased from Rs 50,000 to Rs 75,000 by Budget 2024. For pensioners, the standard deduction applies to pension income just like salary.
How is HRA exemption computed?
HRA exemption (old regime only) is the lowest of three amounts: (1) actual HRA received from employer; (2) actual rent paid minus 10% of Basic+DA; (3) 50% of Basic+DA for metro cities (Mumbai, Delhi, Kolkata, Chennai) or 40% for non-metro. The lowest of these three is exempt. If you live in your own house or your house is in your home town while you work remotely, no HRA exemption is available.
When must I submit landlord PAN for HRA?
If annual rent paid to any single landlord exceeds Rs 1,00,000 per year (i.e., rent above Rs 8,333 per month), you must submit the landlord PAN to your employer to claim HRA exemption. The PAN is submitted through Form 12BB. Without the landlord PAN for high-rent claims, the employer may not allow the HRA exemption and deduct higher TDS.
What retirement benefits are tax-exempt?
Key retirement benefit exemptions under ITA 2025: Gratuity up to Rs 20 lakh (non-government employees covered under Payment of Gratuity Act); Leave encashment at retirement up to Rs 25 lakh (non-government employees); VRS compensation up to Rs 5 lakh; Commuted pension: 1/3 exempt (non-government employee who also receives gratuity) or 1/2 (no gratuity); Provident fund maturity after 5 years: fully exempt.
How do I file ITR if I had two employers in one year?
If you worked for two employers in the same Tax Year, collect Form 16 from both. File ITR-2 or ITR-3 (not ITR-1 which only handles single employer salary). In the ITR, report salary from both employers in Schedule S — employer 1 and employer 2 separately. Add the TDS from both Form 16s. Reconcile with Form 26AS which should show TDS from both employers. Notify the new employer by submitting Form 12B showing previous employer salary and TDS.
