Salary Break-up in ITR-2 for AY 2026-27: What Salaried Taxpayers Need to Know
- Kanchan Bhatt
- Jun 29
- 10 min read
Salaried taxpayers filing ITR-2 for FY 2025-26 are in for a more detailed exercise than before. The updated form now asks for a granular salary break-up in ITR-2 for AY 2026-27 with each component of pay reported individually rather than as a consolidated figure. Basic salary, HRA, perquisites, leave encashment, profits in lieu of salary, everything needs a separate entry under Schedule S.
For taxpayers accustomed to simply entering a net salary figure, this shift may seem unfamiliar. It is not complicated once the logic is understood. And that logic is squarely rooted in Sections 17(1), 17(2), and 17(3) of the Income Tax Act, 1961. Knowing it helps taxpayers report income correctly and avoid mismatches that can delay processing or trigger notices.
Table of Contents
What ITR-2 Means and Who It Applies To
ITR-2 is an income tax return form for individuals and Hindu Undivided Families who do not have income from business or profession. That is the short answer. The longer one involves understanding exactly where the form's applicability begins, because not every salaried taxpayer files it.
ITR-2 applicability kicks in when a taxpayer's profile falls into one or more of these categories:
Total income exceeds ₹50 Lakh in the financial year
Capital gains are present, be it short-term, long-term, or both
There is income from more than one house property
Agricultural income exceeding ₹5,000
Resident but Not Ordinarily Resident (RNOR) or Non-Resident (NR)
Income from other sources
Winnings from lotteries, horse race betting, and other legally permitted forms of gambling
Further, individuals who are directors of any company or who have invested in unlisted equity shares of a company are required to file their income tax return using ITR-2.
Salary Components Under Section 17(1) of the Income Tax Act, 1961
Section 17(1) of the Income Tax Act, 1961 defines 'salary' in its broadest scope. It is not limited to the basic component, it pulls in every element of remuneration that an employee receives from an employer. For the purposes of ITR-2 filing, each of these must be reported individually.
The components falling under Section 17(1) include:
Basic salary
Dearness allowance
Conveyance allowance
House Rent Allowance (HRA)
Leave Travel Allowance (LTA)
Children's education allowance
Other allowances
Employer's contribution to pension scheme
Deemed income on EPF contributions
Annuity or pension
Commuted value of pension
Gratuity
Fees or commission
Advance of salary
Leave encashment
Any other receipts classifiable as salary
Most of these are taxable. Certain allowances, however, attract partial or full exemption under Section 10 of the Income Tax Act, 1961, but only when specific conditions are met. HRA exemption under Section 10(13A) applies only to employees actually paying rent. LTA exemption under Section 10(5) requires travel to have occurred and is restricted to domestic destinations.
The reporting requirement does not change based on whether an allowance is exempt or taxable. Both the gross amount received, and the exempt portion must be entered in the return.
Consider X, whose salary includes the following allowances:
Allowances | Component of Salary Package in ₹ | Exemption Under Section 10 in ₹ |
House Rent Allowance | 1,50,000 | 1,20,000 |
60,000 | 50,000 | |
Gratuity | 4,00,000 | 3,50,000 |
Leave Encashment | 80,000 | 80,000 |
In X's case, the gross amount received under each allowance must first be reported under the relevant salary component in Schedule S of ITR-2. The exemption available under Section 10 is then claimed separately. The balance amount, being the difference between the gross receipt and the exempt portion, forms part of the taxable salary income.
In this case, X received HRA of ₹1,50,000, out of which ₹1,20,000 qualifies for exemption under Section 10(13A). Therefore, only ₹30,000 becomes taxable and is included in salary income.
In each case, X reports the full allowance received and then declares the exempt portion separately. The taxable balance, the difference between the two figures, feeds into his total salary income for the year.
All this information sits in Part B of Form 16. The annexure to Form 16 breaks down individual allowances and specifies the exemptions applied. Taxpayers should work from this document rather than payslips alone, since Form 16 reflects what the employer has actually reported to the tax authorities.
Perquisites Under Section 17(2) of the Income Tax Act, 1961
Perquisites sit under Section 17(2) of the Income Tax Act, 1961. These are non-cash benefits, things provided by an employer either free of charge or at a price below market value. They are part of salary income and are taxable unless an exemption specifically applies.
The list of perquisites that must be reported separately in ITR-2 is fairly extensive:
Rent-free or subsidised accommodation
Company car or other vehicles
Domestic staff, sweeper, gardener, watchman, personal attendant
Gas, electricity, and water expenses borne by the employer
Interest-free or concessional loans
Holiday expenses
Free or concessional travel
Free meals
Free or subsidised education
Gifts and vouchers
Credit card expenses
Club memberships
Use of movable assets
Transfer of assets to the employee below market value
Stock options under non-qualified schemes
Tax on non-monetary perquisites paid by the employer
Any other benefit or amenity
The taxable value for each perquisite is not simply the employer's cost. The Income Tax Act, 1961 and its rules specify how each perquisite is to be valued, accommodation is calculated based on a percentage of salary, cars are valued on prescribed rates, and concessional loans are assessed based on the State Bank of India's benchmark lending rate. Any amount recovered from the employee reduces the taxable value accordingly.
Y's perquisite details illustrate how this works in practice:
Perquisites | Employer Cost (₹) | Recovery from Employee (₹) | Taxable Value - Sec 17(2) (₹) |
Accommodation | 1,80,000 | 20,000 | 1,60,000 |
Car | 60,000 | 10,000 | 50,000 |
Gas, Electricity, Water | 30,000 | — | 30,000 |
Interest-free / Concessional Loan | 20,000 | 5,000 | 15,000 |
Gifts and Vouchers | 5,000 | — | 5,000 |
The figures reported in ITR-2 should not be based on the employer's expenditure alone. The taxable value prescribed under Section 17(2), after reducing any amount recovered from the employee, is the amount that must be disclosed in Schedule S.
For instance, although the employer incurred ₹1,80,000 on accommodation, B contributed ₹20,000. Accordingly, only the taxable value of ₹1,60,000 is reported as a perquisite in the return.
Profits in Lieu of Salary Under Section 17(3) of the Income Tax Act, 1961
Profits in lieu of salary refer to amounts received by an employee instead of salary or in addition to salary. These include compensation for termination or modification of employment terms, amounts received under a Keyman Insurance Policy, and similar receipts.
Under Section 17(3) of the Income Tax Act, such amounts are taxable under the head "Salaries" and must be reported separately while filing ITR-2.
For example, Mr B receives the following payments:
Profits in Lieu of Salary | Value under Section 17 in ₹ |
Compensation received on modification of terms of employment | 1,00,000 |
Sum received under a Keyman Insurance Policy | 50,000 |
Amount received before joining employment | 50,000 |
The details of profits in lieu of salary can be found in Form 12BA, which is issued as a supplement to Form 16.
Where a taxpayer has been employed with more than one employer during a financial year, the relevant salary details must be provided separately for each employment.
The table below provides the broad components of salary and their source of information:
Components of Salary | Source of Information |
Salary, including all allowances | Annexure to Form 16 |
Perquisites | Form 12BA (Statement showing particulars of perquisites and profits in lieu of salary) |
Profits in lieu of salary | Form 12BA (Statement showing particulars of perquisites and profits in lieu of salary) |
Documents Required to File ITR-2
You may need the following documents while filing ITR-2:
Form 16 issued by your employer
Form 16A, if TDS has been deducted on interest earned from fixed deposits or savings accounts
Form 26AS to verify TDS deducted on salary and non-salary income
Rent receipts for calculating HRA, if these were not submitted to your employer
Capital gains statements for transactions involving shares, mutual funds, or other capital assets
Bank passbooks and fixed deposit receipts (FDRs) to determine interest income
Proof of eligible tax-saving investments and expenses for claiming deductions under Sections 80C, 80D, 80G, and 80GG. These may include life and health insurance premium receipts, donation receipts, rent receipts, and tuition fee receipts
Major Changes in ITR-2 for AY 2026-27
The key changes introduced in Form ITR-2 for FY 2025-26 (AY 2026-27) are as follows:
1. Removal of 15% and 10% Capital Gains Tax Rate Fields
Following the changes introduced in Budget 2024, short-term capital gains under Section 111A and long-term capital gains under Section 112A arising on or after 23 July 2024 are taxable at 20% and 12.5%, respectively.
Earlier, these gains were taxed at 15% and 10%. As these rates are no longer applicable for gains arising after 23 July 2024, the corresponding fields have been removed from ITR-2.
Further, the requirement to separately report capital gains before and after 23 July 2024 has also been removed.
2. Simplified Details for Representative Assessee
Earlier, taxpayers were required to provide the name, PAN, capacity, and address of the representative assessee. From AY 2026-27 onwards, these requirements have been simplified. Only the representative assessee’s name, email address, and contact number are required.
3. New Field for Fee on Revised Returns Under Section 234I
Budget 2026 extended the time limit for filing a revised return up to 31 March of the relevant assessment year. However, a fee under Section 234I is payable if the revised return is filed after 31 December. The fee is ₹5,000, which is reduced to ₹1,000 where the total income does not exceed ₹5 Lakh. Accordingly, a new field has been introduced in ITR-2 to capture details relating to this provision.
4. Additional Disclosures Under Sections 80G and 80GGC
Taxpayers claiming deductions under Sections 80G and 80GGC are now required to furnish additional details, such as the transaction reference number and IFSC code. In the case of Section 80GGC, the PAN and name of the political party must also be disclosed. These additional reporting requirements have been introduced to curb illegitimate deduction claims.
Understanding the salary break-up in ITR-2 for AY 2026-27 helps you correctly report each income component, avoid errors, and ensure smooth tax filing compliance. Proper classification of salary details also reduces the chances of notices and ensures accurate return processing.
Frequently Asked Questions
1. What is ITR-2 in straightforward terms?
ITR-2 is the income tax return form for individuals and HUFs who have income from salary, house property, capital gains, or foreign sources, but no income from business or profession. The question of 'what is ITR-2' most often comes up for salaried employees who have sold shares or mutual fund units during the year, the capital gains element takes them out of ITR-1's scope and into ITR-2 territory.
2. What does ITR-2 mean for someone earning above ₹50 Lakh from salary?
For salaried individuals whose total income exceeds ₹50 Lakh, ITR-2 means the applicable filing form. ITR-1 caps out at ₹50 Lakh. Above that threshold, ITR-2 is mandatory regardless of whether other income types are present. The salary break-up requirement also applies in full, each component must be disclosed separately.
3. Who specifically falls within ITR-2 applicability?
ITR-2 applicability covers individuals and HUFs with salary or pension income above ₹50 Lakh, those with capital gains from any asset, those with income from more than one house property, non-residents with Indian income, and anyone holding foreign assets or drawing foreign income. Taxpayers with income solely from business or profession are outside this form's scope.
4. What sections of the Income Tax Act, 1961 govern the salary break-up?
Three sections are relevant when it comes to tax rules regarding salary break-up in the Income Tax Act 1961. Section 17(1) defines salary in the broad sense and covers all allowances. Section 17(2) covers perquisites, non-cash employer-provided benefits. Section 17(3) covers profits in lieu of salary, such as termination payments and Keyman Insurance Policy receipts. The ITR-2 requires separate disclosure under each.
5. Is it necessary to report an allowance even if it is fully exempt?
Yes. Even fully exempt allowances, such as leave encashment that qualifies entirely under Section 10(10AA), must be reported in the return. The taxpayer discloses the gross amount received and the full exempt portion. The Income Tax Department expects to see both figures in the return, not just the taxable net.
6. Where does an employee find perquisite details for ITR-2?
Form 12BA is the document to look for. Issued as a supplement to Form 16, it contains the nature of each perquisite, the employer's cost, any amount recovered from the employee, and the taxable value as computed under the Income Tax Act, 1961. Employees who did not receive any perquisites during the year will generally not receive Form 12BA.
7. What if the employer has not issued Form 12BA?
Employers are required to issue Form 12BA only when taxable perquisites have been provided. If an employee received no such perquisites, the employer is not obligated to issue it. In cases where perquisites were received but Form 12BA has not been issued, the employee should contact the employer's HR or payroll team to obtain the document. Filing without this information can result in reporting errors.
8. How does ITR-2 applicability work when a taxpayer has worked with two employers?
ITR-2 handles multiple employers by requiring a separate salary break-up for each period of employment within the financial year. Form 16 and Form 12BA should be collected from each employer. The salary details, covering Section 17(1), 17(2), and 17(3), are entered for each employer individually, and the totals are aggregated in the overall income computation.
9. Is pension income treated as salary in ITR-2?
Pension is classified as salary income under Section 17(1) of the Income Tax Act, 1961. Retired government employees and private sector retirees drawing pension must report it under the salary head. Commuted pension may attract exemption under Section 10(10A) depending on the category of employee. The gross pension received and any applicable exemptions are to be declared in Schedule S.
10. What is the difference between Section 17(2) perquisites and Section 17(3) profits in lieu of salary?
Perquisites under Section 17(2) are benefits provided during active employment, accommodation, car usage, subsidised meals, concessional loans. Profits in lieu of salary under Section 17(3) are payments received outside the normal wage cycle, compensation on termination, pre-joining payments, post-employment receipts from a former employer. The two are distinct in nature though both are taxable as salary and must be separately disclosed in ITR-2.
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