Salary Income Taxation Under explained: this guide covers what Salary Income Taxation Under means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Salary remains the largest source of personal income tax for India's working population. The Income Tax Act 2025 brings several notable changes to how salary income is computed, what allowances are exempt, and how employers must withhold tax. This guide walks through every component from gross salary to net taxable salary.
What Constitutes "Salary" Under ITA 2025?
Salary under ITA 2025 includes:
- Basic salary, dearness allowance, and all fixed pay components
- Bonus, commission, and incentives
- Taxable perquisites (company car, accommodation, ESOP, etc.)
- Profits in lieu of salary (including golden handshakes above exemption)
- Annuity or pension from a former employer
Standard Deduction
Every salaried employee is entitled to a standard deduction of Rs. 75,000 from gross salary under the default regime (increased from Rs. 50,000 under the old Act). No bills or proofs are required. For pensioners, the same Rs. 75,000 standard deduction applies to pension income treated as salary.
House Rent Allowance (HRA)
Under the default regime, HRA is fully taxable — no exemption is available. Employees wishing to claim HRA exemption must opt for the old regime (where available). The exemption under the old regime is the least of: (a) actual HRA received; (b) rent paid minus 10% of basic salary; (c) 50% of basic salary for metro cities or 40% for non-metros.
Perquisites — Taxable and Exempt
| Perquisite | Taxability |
|---|---|
| Rent-free accommodation (own property) | 15% of salary (metro) / 10% (non-metro) |
| Company car (personal use) | Rs. 1,800–Rs. 2,400/month (engine-based) |
| ESOP (on exercise) | FMV minus exercise price taxed as salary perquisite |
| Meal vouchers up to Rs. 50/meal | Exempt |
| Medical reimbursement (up to Rs. 15,000) | Exempt in old regime only |
| Phone/internet (for work) | Exempt (actual cost) |
| Gift vouchers above Rs. 5,000 | Taxable as perquisite |
Computation of Net Taxable Salary
- Gross Salary (CTC minus employer's PF contribution)
- Less: Exempt allowances (LTA, actual travel)
- Less: Standard deduction Rs. 75,000
- = Net Taxable Salary
Example: Ms. Priya earns gross salary Rs. 14,00,000. She has LTA of Rs. 60,000 claimed (biennial journey). Net taxable = Rs. 14,00,000 – Rs. 60,000 – Rs. 75,000 = Rs. 12,65,000. Tax (default regime): Nil (up to 4L) + Rs.20,000 (4–8L@5%) + Rs.40,000 (8–12L@10%) + Rs.9,750 (12L–12.65L@15%) = Rs.69,750 + 4% cess = Rs.72,540.
Form 12BB — Declaration by Employee
Employees must submit Form 12BB to their employer at the beginning of the tax year declaring all exemptions and deductions they plan to claim. The employer uses this to calculate TDS. Final actual figures are submitted by March.
TDS on Salary — Employer Obligations
Employers must deduct TDS on salary every month (not quarterly). The employer must issue Form 16 by 15 June after the end of the Tax Year. Non-deduction or short-deduction attracts interest at 1%/1.5% per month and penalties.
Gratuity Exemption
Gratuity received on retirement or death is exempt up to Rs. 20 lakh for government employees (fully exempt) and up to Rs. 20 lakh for private employees (Act-covered). The formula: Last drawn basic × 15/26 × completed years of service.
Leave Encashment
Leave salary on retirement is exempt up to Rs. 25 lakh (revised under ITA 2025 from Rs. 3 lakh under old Act). During service, leave encashment is fully taxable.
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