Income from Salary: Taxability, Deductions and Income Tax Calculation for AY 2026–27
- CA Pratik Bharda
- Apr 1
- 21 min read
Income received by an employee from an employer is taxable under the head “Income from Salaries” in accordance with the Income-tax Act. Salary income may include basic salary, dearness allowance, bonus, commission, taxable allowances, perquisites and retirement-related payments, subject to the applicable provisions.
For Assessment Year 2026–27, salaried taxpayers should identify taxable and exempt salary components, claim eligible deductions and compare the tax liability under the Old and New Tax Regimes. A proper salary computation helps determine the correct taxable income, calculate the final tax payable and ensure accurate reporting in the Income Tax Return.
Table of Contents:
Meaning and Scope of Salary Under the Income-tax Act
Salary represents any monetary payment, benefit, facility or compensation received by an employee from an employer in connection with employment. Salary income is not limited to cash payments. Non-monetary benefits, such as employer-provided accommodation, transport facilities or other perquisites, may also form part of taxable salary.
For income-tax purposes, salary is taxable only where an employer–employee relationship exists between the payer and the recipient. The tax treatment of salary may differ from its treatment under accounting, labour or other laws.
Definition of Salary Under Section 17(1)
Section 17(1) of the Income-tax Act provides an inclusive definition of salary. This means that, in addition to the items specifically listed in the section, other payments or benefits arising from employment may also be treated as salary depending on their nature and the applicable facts.
Salary generally includes the following components:
Basic salary received under the terms of employment.
Wages payable by an employer to an employee.
Allowances, including House Rent Allowance, Leave Travel Allowance, children education allowance and special allowance.
Bonus, incentive and variable pay, including performance-linked remuneration.
Fees and commission received as part of employment.
Perquisites, such as rent-free accommodation, concessional accommodation, motor-car facilities and other benefits provided in kind.
Advance salary received before it becomes due.
Leave encashment received in respect of accumulated leave.
Pension or annuity received in connection with past employment.
Gratuity received on retirement, resignation or termination, subject to the applicable exemption provisions.
Compensation for termination of employment or modification of the terms and conditions of employment.
Taxable employer contributions to recognised provident fund, approved superannuation fund or the National Pension System, where the prescribed limits are exceeded.
Annual accretion on specified employer contributions, where taxable under the applicable provisions.
Important Tax Treatment
The inclusion of an amount within the definition of salary does not necessarily mean that the entire amount is taxable. Certain allowances, retirement benefits and perquisites may qualify for full or partial exemption, subject to the prescribed conditions and limits under the Income-tax Act.
Key Salary Components and Their Income-Tax Treatment
An employee’s salary may consist of basic pay, allowances, bonus, employer and employee contributions, and other employment-related payments. Each component is subject to a separate tax treatment depending on its nature, the conditions prescribed under the Income-tax Act, and the tax regime selected by the employee.
1. Basic Salary
Basic salary is the fixed component of an employee’s remuneration and generally forms the basis for determining several other salary-related payments and contributions.
Tax Treatment
Basic salary is fully taxable under the head “Income from Salaries.”
Components such as House Rent Allowance, provident fund contributions, gratuity and certain other benefits may be calculated with reference to basic salary, depending on the employment terms and applicable law.
Basic salary usually constitutes a significant portion of the employee’s total remuneration.
2. House Rent Allowance
House Rent Allowance is paid by an employer to meet an employee’s expenditure on rented residential accommodation. Eligible employees may claim exemption under Section 10(13A) read with Rule 2A, subject to the prescribed conditions.
HRA Exemption Under the Old Tax Regime
The amount of exemption is generally restricted to the least of the following:
actual HRA received;
rent paid minus 10% of salary; or
50% of salary where the rented accommodation is situated in Delhi, Mumbai, Kolkata or Chennai, or 40% of salary for any other location.
The balance HRA, if any, is taxable as salary income.
Treatment Under the New Tax Regime
The exemption under Section 10(13A) is generally not available under the New Tax Regime. Accordingly, the HRA received is taxable.
Rent Paid to Parents
An employee residing in a property owned by their parents may claim HRA exemption where:
the rental arrangement is genuine;
rent is actually paid;
a valid rent agreement is maintained;
rent receipts and bank-payment records are available; and
the employee does not own the rented property.
The rent received must be reported by the parent as income from house property.
3. Leave Travel Allowance
Leave Travel Allowance or Leave Travel Concession is an allowance provided by an employer for travel undertaken by an employee and eligible family members within India.
An exemption may be claimed under Section 10(5), subject to the prescribed conditions.
Key Conditions
The journey must be undertaken within India.
The exemption is limited to eligible travel fare and does not cover hotel expenses, meals, sightseeing or local conveyance.
The exemption cannot exceed the actual eligible expenditure incurred.
Eligible family members generally include the employee’s spouse, children and dependent parents, brothers and sisters, subject to the prescribed conditions.
The exemption is ordinarily available for two journeys in a block of four calendar years.
Supporting travel documents should be submitted to the employer or retained for verification.
The exemption is generally available only under the Old Tax Regime.
4. Bonus, Incentive and Variable Pay
Bonus, performance incentive, variable pay and similar employment-linked payments form part of salary income.
Tax Treatment
Such amounts are fully taxable under the head “Income from Salaries.”
The amount is generally taxable in the year in which it becomes due or is received, whichever is earlier, subject to the salary taxation provisions.
The payment may be linked to employee performance, appraisal ratings, organisational results or company policy.
Tax is generally deducted by the employer through TDS along with other salary income.
5. Employee Contribution to Provident Fund
The Employees’ Provident Fund is a statutory retirement-benefit scheme governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
Contribution and Tax Treatment
The employee and employer generally contribute at the prescribed rate on eligible wages, subject to the applicable provident fund rules.
The employee’s contribution may qualify for deduction under Section 80C, within the overall limit of ₹1.5 lakh, where the employee opts for the Old Tax Regime.
The employer’s contribution is subject to the limits and taxability rules prescribed under the Income-tax Act.
Interest credited to the employee’s account is governed by the rate notified for the relevant financial year.
EPFO notified an interest rate of 8.25% for FY 2024–25. Since the rate is declared separately for each year, the applicable rate should be verified for the relevant financial year.
Withdrawal from the provident fund may be taxable and subject to TDS depending on the period of service, amount withdrawn, PAN availability and other prescribed conditions.
6. Professional Tax
Professional tax is a tax on professions, trades, callings and employment levied by state governments under the applicable state legislation.
Tax Treatment
The rates and payment requirements differ from one state to another.
The maximum professional tax that may be levied is ₹2,500 per person per financial year.
It is generally deducted by the employer from salary and deposited with the relevant state authority.
Professional tax actually paid by the employee is deductible from salary income under Section 16(iii).
This deduction is available under the Old Tax Regime and is generally not available under the New Tax Regime.
Important: Salary components should be reviewed with reference to the employee’s Form 16, salary slips, employment terms and selected tax regime before computing taxable salary.
Difference Between Cost to Company and Take-Home Salary for Income-Tax Purposes
Cost to Company (CTC) represents the total annual expenditure incurred by an employer in relation to an employee. It may include cash salary, employer contributions to retirement funds, reimbursements, insurance benefits and non-monetary facilities provided under the employment
arrangement.
Take-home salary, also referred to as net salary, is the amount actually credited to the employee’s bank account after deducting statutory contributions, tax deducted at source and other authorised recoveries.
Components Generally Included in CTC
CTC may broadly include:
basic salary and other monthly salary components;
House Rent Allowance, special allowance, bonus and incentives;
employer’s contribution to provident fund, pension fund or other retirement-benefit schemes;
gratuity forming part of the employment cost;
employer-paid medical or group insurance;
meal benefits, transport or cab facilities;
mobile phone, internet or other reimbursements; and
taxable or exempt perquisites provided by the employer.
Not every component forming part of CTC is paid directly to the employee in cash. Certain amounts represent employer contributions, reimbursements or benefits provided in kind.
Components Considered While Determining Take-Home Salary
Take-home salary is generally computed after reducing the applicable deductions from gross monthly salary.
Gross Monthly Salary
This includes the salary components payable to the employee for the relevant month, such as basic salary, allowances, bonus or incentive, where applicable.
Less: Employee-Side Deductions
The following amounts may be deducted from gross salary:
employee’s contribution to provident fund;
professional tax, where applicable;
employee’s contribution towards insurance or other benefit schemes;
loan recovery or other authorised payroll deductions; and
tax deducted at source on salary.
Illustrative Formula
Take-Home Salary = Gross Salary (−) Employee Contributions (−) Professional Tax (−) TDS (− ) Other Payroll Deductions
The tax deducted from salary is determined by the employer after considering the employee’s estimated taxable income, eligible exemptions, deductions and the tax regime selected for the relevant financial year.
Accordingly, an employee’s CTC is generally higher than both gross salary and take-home salary, since CTC may include employer-side contributions and non-cash benefits that are not directly credited to the employee.
Tax Deductions and Benefits Available to Salaried Taxpayers
Salaried taxpayers may be eligible to claim various deductions, exemptions and tax benefits under the Income-tax Act, subject to the prescribed conditions and the tax regime opted for. While certain deductions are available only under the Old Tax Regime, some benefits continue to be available under both the Old and New Tax Regimes. Proper tax planning and identification of eligible deductions can help reduce the overall tax liability.
1. Deduction for Specified Investments – Section 80C
Section 80C allows a deduction in respect of specified investments and eligible expenditures, subject to an overall limit of ₹1.5 lakh in a financial year.
Eligible investments and payments include:
Employee's contribution to Provident Fund (PF);
Public Provident Fund (PPF);
Equity Linked Savings Scheme (ELSS);
Life insurance premium;
National Savings Certificate (NSC);
Tax-saving fixed deposits;
Tuition fees for eligible children; and
Principal repayment of a housing loan.
Tax Treatment
The maximum deduction available under Section 80C is ₹1.5 lakh.
This deduction is available only under the Old Tax Regime.
2. Deduction for Medical Insurance Premium – Section 80D
Section 80D provides a deduction for medical insurance premiums paid for self, family and parents, subject to the prescribed monetary limits.
Deduction Limits
Up to ₹25,000 for medical insurance premium paid for self, spouse and dependent children.
An additional deduction of up to ₹25,000 for medical insurance premium paid for parents.
Where the insured person is a senior citizen, the deduction limit increases to ₹50,000, subject to the applicable provisions.
Tax Treatment
The deduction is available only where the prescribed conditions under Section 80D are satisfied.
This deduction is generally available only under the Old Tax Regime.
3. Deduction for Home Loan Interest – Section 24(b)
Interest paid on a housing loan may be claimed as a deduction under Section 24(b), subject to the nature of the property and the applicable provisions of the Income-tax Act.
Self-Occupied Property
A deduction of up to ₹2 lakh may be claimed for interest paid on a housing loan for a self-occupied house property, subject to the prescribed conditions.
This benefit is generally available under the Old Tax Regime.
Let-Out Property
The actual interest payable on a housing loan for a let-out property may be claimed while computing income from house property.
However, the set-off and carry-forward of loss arising from house property are subject to Sections 71(3A) and 71B, as applicable.
The tax treatment differs under the Old and New Tax Regimes.
4. Deduction for National Pension System Contributions – Sections 80CCD(1), 80CCD(1B) and 80CCD(2)
Contributions made to the National Pension System (NPS) qualify for deduction under different provisions of the Income-tax Act.
Employee's Contribution
An employee may claim:
deduction under Section 80CCD(1) within the overall limit specified under Section 80C; and
an additional deduction of up to ₹50,000 under Section 80CCD(1B).
These deductions are generally available under the Old Tax Regime.
Employer's Contribution
Employer's contribution to the National Pension System qualifies for deduction under Section 80CCD(2), subject to the prescribed percentage of salary.
Tax Treatment
The deduction under Section 80CCD(2) is available under both the Old Tax Regime and the New Tax Regime, subject to the applicable limits.
The permissible percentage of salary depends on the category of employer and the provisions applicable for the relevant assessment year.
Important: The availability of deductions and exemptions depends on the tax regime selected by the taxpayer. Salaried individuals should evaluate both the Old and New Tax Regimes before filing the Income Tax Return to determine the most beneficial option.
Tax Deductions, Exemptions and Reliefs Available on Salary Income
Salaried taxpayers may claim specified deductions, exemptions and reliefs while computing taxable income, subject to the conditions prescribed under the Income-tax Act. Certain benefits are available only under the Old Tax Regime, whereas specified deductions, such as the standard deduction and eligible employer contribution to the National Pension System, may also be claimed under the New Tax Regime.
1. Deduction for Specified Investments and Payments – Section 80C
A deduction under Section 80C may be claimed for prescribed investments and eligible payments, subject to the overall limit of ₹1.5 lakh for the relevant financial year.
Eligible items may include:
employee contribution to a recognised provident fund;
Public Provident Fund;
life insurance premium;
Equity Linked Savings Scheme;
National Savings Certificate;
eligible tuition fees;
principal repayment of a housing loan; and
other prescribed investments or payments.
The deduction under Section 80C is available only where the taxpayer opts for the Old Tax Regime.
2. Deduction for Medical Insurance and Eligible Medical Expenditure – Section 80D
Section 80D permits a deduction for medical insurance premium and specified medical expenditure, subject to the prescribed conditions.
The deduction limits are:
up to ₹25,000 for self, spouse and dependent children;
an additional deduction of up to ₹25,000 for parents; and
up to ₹50,000 where the insured person or parent is a senior citizen.
The deduction is generally available only under the Old Tax Regime.
3. Deduction for Interest on Housing Loan – Section 24(b)
Interest payable on borrowed capital for the acquisition, construction, repair, renewal or reconstruction of a house property may be deductible under Section 24(b).
Self-Occupied House Property
For an eligible self-occupied property, interest deduction may be claimed up to ₹2 lakh, subject to the prescribed conditions. This deduction is generally available under the Old Tax Regime.
Let-Out House Property
For a let-out property, the eligible interest payable may be deducted while computing income under the head “Income from House Property.” However, the set-off and carry-forward of the resulting house-property loss remain subject to the applicable statutory restrictions.
Under the New Tax Regime, the treatment of housing-loan interest depends on the nature of the property and the restrictions prescribed under Section 115BAC.
4. Deduction for Contributions to the National Pension System
Contributions to the National Pension System may qualify for deduction under different provisions.
Employee’s Own Contribution
An employee may claim:
deduction under Section 80CCD(1) within the combined ceiling under Section 80CCE; and
an additional deduction of up to ₹50,000 under Section 80CCD(1B).
These deductions are generally available only under the Old Tax Regime.
Employer’s Contribution
Employer contribution to the employee’s NPS account may qualify for deduction under Section 80CCD(2), subject to the prescribed percentage of salary.
For AY 2026–27, the permissible limit may extend to 14% of salary in cases covered by the applicable provisions. The deduction under Section 80CCD(2) remains available under the New Tax Regime as well.
Salary-Specific Deductions, Exemptions and Tax Reliefs
In addition to Chapter VI-A deductions, the Income-tax Act provides certain benefits specifically connected with salary, retirement receipts and employment-related payments.
1. Standard Deduction From Salary – Section 16(ia)
The standard deduction is a fixed deduction allowed from taxable salary without requiring proof of actual expenditure.
For AY 2026–27:
up to ₹50,000 may be claimed under the Old Tax Regime; and
up to ₹75,000 may be claimed under the New Tax Regime,
subject to the deduction not exceeding the amount of eligible salary or pension income.
2. Exemption for Leave Encashment – Section 10(10AA)
Leave encashment represents an amount received in respect of accumulated earned leave.
Leave Encashment During Employment
Leave encashment received while continuing in employment is generally fully taxable as salary income.
Leave Encashment at Retirement or Termination
Leave encashment received by Central or State Government employees at retirement is generally fully exempt.
For eligible non-government employees, the exemption is restricted to the least of the following:
actual leave encashment received;
notified monetary ceiling of ₹25 lakh;
ten months’ average salary; or
cash equivalent of leave standing to the employee’s credit, calculated in accordance with the prescribed conditions.
The balance amount, if any, is taxable under the head “Income from Salaries.
3. Relief for Salary Received in Arrears or Advance – Section 89
Where salary is received in arrears or in advance and such receipt results in a higher rate of tax, relief may be claimed under Section 89, read with Rule 21A.
The relief broadly compares:
tax payable in the year of receipt, including the additional salary;
tax payable in that year, excluding the additional salary;
tax attributable to the additional salary in the year of receipt; and
tax that would have been payable had the additional salary been taxed in the year to which it relates.
The excess of the tax impact in the year of receipt over the tax impact in the relevant earlier year is allowed as relief.
Form 10E must be furnished electronically before claiming the relief in the Income Tax Return.
4. Exemption for Compensation Received on Voluntary Retirement – Section 10(10C)
Compensation received on voluntary retirement or voluntary separation may qualify for exemption under Section 10(10C), subject to the prescribed conditions.
The exemption is restricted to the lower of:
the actual compensation received; or
₹5 lakh.
The exemption is generally available only once and applies to employees of specified employers and institutions covered by the provision.
Where relief under Section 89 has been claimed in respect of the same voluntary-retirement compensation, exemption under Section 10(10C) cannot ordinarily be claimed for that amount.
5. Tax Treatment of Pension and Commuted Pension
Pension received periodically by a retired employee is generally taxable under the head “Income from Salaries.”
Uncommuted Pension
Regular or monthly pension is fully taxable as salary income.
Commuted Pension
Commuted pension refers to a lump-sum amount received in place of the whole or part of the periodic pension.
For Central, State and local-authority employees, eligible commuted pension is generally fully exempt.
For other employees:
where gratuity is also received, exemption is generally restricted to one-third of the full commuted value; and
where gratuity is not received, exemption is generally restricted to one-half of the full commuted value.
Any amount exceeding the eligible exemption is taxable as salary income.
Tax-regime consideration: The availability of each deduction or exemption should be reviewed separately before selecting the tax regime. The taxpayer should reconcile the claim with Form 16, salary records, investment proofs and other supporting documents.
6. Gratuity: Exemption and Taxability on Retirement or Termination
Gratuity is a terminal benefit paid by an employer in recognition of an employee’s continuous service. It is ordinarily payable on retirement, resignation, superannuation, death or disablement in accordance with the applicable gratuity law and employment conditions.
An employee is generally required to complete at least five years of continuous service to become eligible for gratuity. This minimum service requirement does not ordinarily apply where employment is terminated due to death or disablement.
Gratuity Received by Government Employees
Death-cum-retirement gratuity received by an employee of the Central Government, State Government or a local authority is fully exempt under Section 10(10)(i).
Gratuity Received by Employees Covered Under the Payment of Gratuity Act
For an employee covered by the Payment of Gratuity Act, the exemption under Section 10(10)(ii) is restricted to the least of:
actual gratuity received;
the notified exemption ceiling of ₹20 lakh; or
15 days’ salary for each completed year of service or part thereof exceeding six months, calculated in the prescribed manner.
Gratuity Received by Other Employees
For an employee not covered by the Payment of Gratuity Act, the exemption under Section 10(10)(iii) is restricted to the least of:
actual gratuity received;
₹20 lakh; or
half month’s average salary for each completed year of service.
Any gratuity exceeding the eligible exemption is taxable under the head “Income from Salaries.” The exemption under Section 10(10) is available under both the Old and New Tax Regimes, subject to the prescribed conditions and the overall monetary ceiling.
Computation of Income Tax on Salary for AY 2026–27
Income tax on salary is calculated after determining taxable salary, aggregating income under the other applicable heads, reducing eligible deductions and applying the tax rates prescribed for the selected tax regime.
Step 1: Determine Income Chargeable Under the Head “Salaries”
Gross salary may include:
basic salary;
dearness allowance;
bonus, commission and incentives;
taxable allowances;
taxable perquisites;
advance salary and salary arrears; and
retirement-related receipts taxable as salary.
Eligible exemptions and deductions must be reduced in accordance with the applicable provisions and the tax regime selected by the employee.
Step 2: Aggregate Income Under All Applicable Heads
Salary income must be combined with income chargeable under the following heads, wherever applicable:
Income from House Property;
Profits and Gains of Business or Profession;
Capital Gains; and
Income from Other Sources.
Permissible set-off of losses must also be considered before determining Gross Total Income.
Step 3: Reduce Eligible Deductions
Eligible Chapter VI-A deductions may be reduced from Gross Total Income, subject to the conditions prescribed under the selected tax regime.
Under the Old Tax Regime, deductions may include Sections 80C, 80D, 80CCD(1B), 80E and 80G. Under the New Tax Regime, most deductions are restricted, although specified benefits such as the employer’s eligible NPS contribution under Section 80CCD(2) remain available.
Step 4: Apply the Applicable Tax Rates
Income taxable at normal rates is subject to the slab rates applicable for Financial Year 2025–26, corresponding to Assessment Year 2026–27. Income taxable at special rates, such as specified capital gains, lottery winnings or online gaming income, must be calculated separately.
New Tax Regime Slab Rates for AY 2026–27
Total Income | Tax Rate |
Up to ₹4 lakh | Nil |
Above ₹4 lakh up to ₹8 lakh | 5% |
Above ₹8 lakh up to ₹12 lakh | 10% |
Above ₹12 lakh up to ₹16 lakh | 15% |
Above ₹16 lakh up to ₹20 lakh | 20% |
Above ₹20 lakh up to ₹24 lakh | 25% |
Above ₹24 lakh | 30% |
Old Tax Regime Slab Rates for AY 2026–27
Individuals Below 60 Years of Age
Total Income | Tax Rate |
Up to ₹2.5 lakh | Nil |
Above ₹2.5 lakh up to ₹5 lakh | 5% |
Above ₹5 lakh up to ₹10 lakh | 20% |
Above ₹10 lakh | 30% |
Resident Senior Citizens Aged 60 Years or More but Below 80 Years
Total Income | Tax Rate |
Up to ₹3 lakh | Nil |
Above ₹3 lakh up to ₹5 lakh | 5% |
Above ₹5 lakh up to ₹10 lakh | 20% |
Above ₹10 lakh | 30% |
Resident Super Senior Citizens Aged 80 Years or More
Total Income | Tax Rate |
Up to ₹5 lakh | Nil |
Above ₹5 lakh up to ₹10 lakh | 20% |
Above ₹10 lakh | 30% |
The higher basic exemption limits for senior and super senior citizens apply only under the Old Tax Regime.
Step 5: Claim Rebate Under Section 87A
A resident individual may claim rebate under Section 87A, subject to the prescribed conditions:
Under the New Tax Regime, rebate of up to ₹60,000 is available where total income does not exceed ₹12 lakh.
Under the Old Tax Regime, rebate of up to ₹12,500 is available where total income does not exceed ₹5 lakh.
The rebate does not ordinarily apply to income taxable at specified special rates where the law excludes such income from the benefit.
Step 6: Add Surcharge and Health and Education Cess
Surcharge must be added where total income exceeds the prescribed threshold. Thereafter, Health and Education Cess at 4% is levied on the amount of income tax and surcharge, if any.
Step 7: Reduce Taxes Already Paid
The following credits should be reduced from the gross tax liability:
tax deducted at source;
tax collected at source;
advance tax;
self-assessment tax already paid; and
eligible relief or foreign tax credit.
The resulting amount represents the net tax payable or the refund claimable in the Income Tax Return.
Documents Required for Filing ITR by Salaried Taxpayers
A salaried taxpayer should collect and reconcile the relevant income, tax-credit and deduction documents before filing the Income Tax Return. Although supporting documents are generally not required to be uploaded with the return, they should be retained to substantiate the income, exemptions, deductions and tax credits reported.
1. Form 16 – Salary and TDS Certificate
Form 16 is the certificate issued by an employer in respect of salary paid and tax deducted at source. It contains details of salary income, exemptions, deductions considered by the employer and TDS deposited with the Central Government.
Form 16 is divided into two parts:
Part A contains details of the employer and employee, including PAN, TAN, period of employment and tax deducted and deposited.
Part B contains the salary computation, exempt allowances, deductions under Section 16, eligible Chapter VI-A deductions considered by the employer and tax payable.
Where an employee has worked with more than one employer during the financial year, Form 16 should be obtained from each employer.
2. Form 26AS – Statement of Tax Deducted and Collected
Form 26AS is the taxpayer’s annual tax-credit statement. It principally contains details of:
tax deducted at source;
tax collected at source;
advance tax and self-assessment tax paid;
refunds issued; and
specified tax-related information available with the Department.
The TDS shown in Form 16 should be reconciled with Form 26AS before the return is filed. Any mismatch should be taken up with the employer or other deductor for correction.
3. Annual Information Statement
The Annual Information Statement (AIS) provides a broader statement of financial information reported to the Income Tax Department by employers, banks, financial institutions, registrars and other reporting entities.
Depending on the taxpayer’s transactions, AIS may include:
salary income;
interest on savings accounts, fixed deposits and recurring deposits;
dividends;
purchase and sale of securities or mutual funds;
capital gains-related transactions;
purchase or sale of immovable property;
foreign remittances;
tax payments and refunds; and
other specified financial transactions.
The taxpayer should verify the AIS and submit feedback through the portal where any information is incorrect, duplicated or does not relate to the taxpayer. From AY 2023–24 onward, Form 26AS primarily displays TDS and TCS information, while wider financial information is generally reflected in AIS.
4. Additional Supporting Documents
Depending on the nature of income and deductions claimed, a salaried taxpayer may also require:
salary slips and employment statements;
bank statements and interest certificates;
rent agreement and rent receipts for HRA exemption;
housing-loan interest certificate;
investment and insurance-premium receipts;
medical-insurance premium receipts;
National Pension System contribution statement;
capital-gains statements;
donation receipts;
evidence of advance tax or self-assessment tax paid; and
Form 10E where relief for salary arrears or advance salary is claimed.
Form 16, Form 26AS, AIS and the taxpayer’s underlying financial records should be reconciled before filing the return.
Salary-Related Changes Under the Income-tax Rules, 2026
The Income-tax Act, 2025 and the Income-tax Rules, 2026 came into force on 1 April 2026. These provisions apply to tax years beginning on or after that date. Income relating to financial years beginning before 1 April 2026 continues to be governed by the Income-tax Act, 1961 and the corresponding rules.
Accordingly, the following revised limits should not be presented as applicable to AY 2026–27, which relates to FY 2025–26. They apply under the 2026 framework from the tax year commencing on 1 April 2026.
Revised Limits for Selected Salary Allowances and Perquisites
Salary component | Earlier limit | Limit under the 2026 Rules |
Children education allowance | ₹100 per month per child | ₹3,000 per month per child |
Hostel expenditure allowance | ₹300 per month per child | ₹9,000 per month per child |
Free meals | ₹50 per meal | ₹200 per meal |
Non-cash gifts | ₹5,000 per year | ₹15,000 per year |
Motor car with engine capacity up to 1.6 litres | ₹1,800 plus ₹900 for chauffeur | ₹5,000 plus ₹3,000 for chauffeur |
Motor car with engine capacity above 1.6 litres | ₹2,400 plus ₹900 for chauffeur | ₹7,000 plus ₹3,000 for chauffeur |
Overseas medical treatment | Income limit of ₹2 lakh | Income limit of ₹8 lakh |
The revised children education and hostel allowance limits are prescribed under Rule 280 of the Income-tax Rules, 2026.
Conclusion: Verification of Salary Income Before Filing ITR
Before filing the Income Tax Return, a salaried taxpayer should reconcile Form 16 with Form 26AS and AIS, include income not considered by the employer and verify the availability of exemptions and deductions under the selected tax regime.
The return should be prepared with reference to the law applicable to the relevant financial or tax year. In particular, changes effective from 1 April 2026 should not be applied while computing income for AY 2026–27 unless the applicable transitional provisions specifically provide otherwise.
FAQs
Q1. Are Salary Arrears Taxable?
Yes. Salary received in arrears or in advance is taxable in the financial year in which it is received, even where it relates to an earlier year. Where such receipt results in a higher tax liability, the employee may claim relief under Section 89, subject to the prescribed computation under Rule 21A. Form 10E must be filed electronically before claiming the relief in the Income Tax Return.
Q2. What Are Perquisites and How Are They Taxed?
Perquisites are benefits, amenities or facilities provided by an employer to an employee in addition to monetary salary. They may include rent-free accommodation, motor-car facilities, concessional loans, employer-paid expenses and other benefits connected with employment. The taxable value of a perquisite is included in salary income in accordance with Section 17(2) and the applicable valuation rules. Certain prescribed perquisites may be exempt or taxable only when specified conditions are satisfied.
Q3. Are All Allowances Received by an Employee Taxable?
Allowances form part of salary and are generally taxable unless a specific exemption is available under the Income-tax Act. Depending on the applicable conditions and the tax regime selected, exemptions may be available for specified allowances, including:
House Rent Allowance under Section 10(13A);
Leave Travel Allowance under Section 10(5); and
other prescribed allowances under Section 10.
Any portion of an allowance not covered by an exemption is taxable under the head “Income from Salaries.” Most salary-related exemptions are not available under the New Tax Regime.
Q4. Is Every Type of Pension Taxable as Salary Income?
No. The tax treatment depends on the source and nature of the pension.
Regular pension received from a present or former employer is generally taxable under the head “Income from Salaries.”
Commuted pension may qualify for full or partial exemption, subject to the applicable provisions.
Family pension received by the legal heir of a deceased employee is generally taxable under the head “Income from Other Sources” and not as salary.
Annuity or pension received under an independent insurance or retirement policy is taxed according to the nature and terms of that arrangement.
Pension connected with employment is included within the statutory scope of salary under Section 17.
Q5. Which Income Tax Return Form Should a Salaried Individual File?
The applicable ITR form depends on the taxpayer’s residential status, total income and nature of income.For AY 2026–27, a resident individual may generally use ITR-1 (Sahaj) where the prescribed eligibility conditions are satisfied, including total income not exceeding ₹50 lakh and income arising from permitted sources such as salary or pension, up to two house properties and specified income from other sources.ITR-1 cannot be used where the taxpayer is subject to any prescribed exclusion. A salaried taxpayer who is not eligible for ITR-1 may be required to file ITR-2 or another applicable return form, depending on the nature of income.
