Salary, Perquisites, ESOP & EPF —
How Each Is Taxed
The FY 2025-26 rules for salary and its exemptions, perquisites including ESOP, EPF and retirement benefits, and other income such as FD interest, dividends and gifts — what is exempt, what is taxable and at what rate.
Salary is taxed at slab rates after a standard deduction of Rs 75,000 (new regime) or Rs 50,000 (old regime). Most salary exemptions — HRA u/s 10(13A), LTA u/s 10(5) — apply only in the old regime. ESOPs are taxed as a perquisite at exercise (FMV minus exercise price, at slab), then as capital gains at sale. EPF interest is tax-free up to Rs 2.5 lakh of your own yearly contribution; FD interest and dividends are fully taxable at slab, with TDS.
The new tax regime is now the default. It gives a higher Rs 75,000 standard deduction but removes almost all salary exemptions (HRA, LTA) and Chapter VI-A deductions. To claim HRA, LTA, 80C, 80D etc. you must actively opt for the old regime when filing.
Salary Components & What Is Exempt
Salary is taxed under the head "Income from Salaries". A standard deduction is available in both regimes; the big allowance exemptions survive only in the old regime.
| Component | Section | Exemption / limit | New regime |
|---|---|---|---|
| Standard deduction | 16(ia) | Rs 75,000 (new) / Rs 50,000 (old) | Yes |
| House Rent Allowance (HRA) | 10(13A) | Least of actual HRA, 50%/40% of basic+DA, rent − 10% salary | Old only |
| Leave Travel Allowance (LTA) | 10(5) | Domestic travel, 2 journeys in a 4-year block | Old only |
| Gratuity (non-govt) | 10(10) | Up to Rs 20,00,000 | Yes |
| Leave encashment on retirement | 10(10AA) | Up to Rs 25,00,000 (non-govt) | Yes |
| Retrenchment compensation | 10(10B) | Up to Rs 5,00,000 | Yes |
| Family pension standard deduction | 57(iia) | One-third, up to Rs 25,000 | Yes |
HRA/LTA figures are the statutory formulae; the new (default) regime disallows them. Use our HRA calculator if you are on the old regime.
Not sure which regime saves you more on your CTC?
Compare regimes →Perquisites & ESOP Taxation
Perquisites are non-cash benefits from an employer, valued under Rule 3 (revised 2023) and added to salary. Common ones are rent-free or concessional accommodation, a company car, and ESOPs. Employer contributions to EPF + NPS + superannuation are taxable to the extent they exceed Rs 7,50,000 in a year.
How ESOPs are taxed — two stages
At exercise, the perquisite equals the Fair Market Value of the shares on the exercise date minus the exercise price you pay; it is taxed as salary at your slab rate, with TDS by the employer. At sale, the gain over the FMV-at-exercise is capital gains — listed shares: LTCG 12.5% above Rs 1.25 lakh (held > 12 months) or STCG 20% (≤ 12 months).
At exercise — perquisite (salary)
At sale — capital gains
Employees of an eligible DPIIT-recognised startup can defer the perquisite TDS at exercise to the earliest of: the sale of the shares, leaving the company, or 5 years from the end of the exercise financial year. This eases the cash-flow strain of paying tax before the illiquid shares are actually sold.
EPF, VPF & Retirement Benefits
Both employee and employer contribute 12% of basic+DA to EPF. The current EPF interest rate is 8.25% (FY 2024-25, notified by the government in May 2025). VPF (Voluntary Provident Fund) is an optional extra employee contribution earning the same rate.
| Item | Section | Taxability |
|---|---|---|
| Interest on employee PF contribution above Rs 2.5 lakh/year | 10(11)/(12) | Taxable (Rs 5 lakh if no employer contribution) |
| Employer EPF + NPS + superannuation above Rs 7.5 lakh/year | 17(2)(vii) | Taxable perquisite |
| EPF withdrawal after 5 years continuous service | 10(12) | Exempt |
| EPF withdrawal before 5 years (> Rs 50,000) | 192A | Taxable · TDS 10% (max marginal rate without PAN) |
| Transfer of PF on job change | — | Not taxable |
TDS u/s 192A applies only to premature withdrawals over Rs 50,000; Form 15G/15H can avoid it if income is below the taxable limit.
If you withdraw your EPF before completing 5 years of continuous service (counting service across transferred accounts), the accumulated balance becomes taxable and TDS applies u/s 192A at 10% (at the maximum marginal rate if you have not furnished PAN). Transferring the PF to your new employer instead of withdrawing keeps it tax-free and preserves the 5-year clock.
On retirement, gratuity is exempt u/s 10(10) up to Rs 20 lakh (non-govt), leave encashment u/s 10(10AA) up to Rs 25 lakh (non-govt, raised in 2023), and commuted pension is exempt u/s 10(10A).
FD Interest, Dividends, Gifts & Bonus
| Income | Taxed at | TDS | Threshold (Budget 2025) |
|---|---|---|---|
| Bank / FD interest | Slab | 194A @ 10% | Rs 50,000 general / Rs 1,00,000 senior |
| Dividend income | Slab | 194 @ 10% | Above Rs 10,000/year |
| Gift from non-relative | Slab | — | Taxable if > Rs 50,000/year, u/s 56(2)(x) |
| Bonus / incentive from employer | Slab | 192 (salary) | Fully taxable as salary |
Dividends are taxable in the shareholder's hands at slab since FY 2020-21 (DDT abolished). Gifts from specified relatives and on marriage are exempt regardless of amount.
In the old regime only, savings-account interest is deductible up to Rs 10,000 u/s 80TTA, and senior citizens get up to Rs 50,000 on all deposit interest u/s 80TTB.
How to Report It All in Your ITR
- Form 16 from your employer (salary + TDS)
- ESOP perquisite value in Form 12BA
- EPF passbook / withdrawal statement
- Form 26AS & AIS for interest, dividend, TDS
- Bank & FD interest certificates
- Capital gains statement for shares sold
- HRA rent receipts (old regime only)
- Choose old vs new regime before filing
Salary, ESOP, EPF and capital gains in one return? Let a CA file it right.
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