Understanding the head ‘Income from Salary’ is important for students because when students after graduating step in their first dream job, their enthusiasm turns into a query – What is my actual salary? A few new terms like Basic, DA, HRA, Conveyance allowance, PF and Professional Tax deduction seem very perplexing. They can’t understand why take-home salary is not same as mentioned in the offer letter.
What constitutes ‘Salary’ under Income Tax Act, 1961? This awareness is very important for everyone who are ready to join corporate. How pay roll structure work in practice?
Let each and every student know the case study of Anushree during her career
Anushree, joined as ‘Tax Associate” in a big Consulting Firm. She got the offer letter from the company with a CTC of Rs. 14,00,000 annually. But her enthusiasm turned into wonder when she received the pay-slip in the first month and found her take-home salary is much less than what she calculated based on her offer letter.
She then walked straight to the HR manager and asked Sir my, CTC is Rs 14,00,000 per year but my bank account shows much less amount. HR Manger replied your take-home salary is less because of some deduction s like PF contribution, professional tax and income tax deductions.
What is Salary Sec.17(1) of Income Tax Act,1961?
In common term, “Salary includes all payments received by the employee from the employer in cash or kind and includes
- Basic
- All taxable and non- taxable allowances
- Bonus, commission, perquisites
- Leave salary
- Gratuity, pension
- Employer’s contribution to Provident Fund
Allowances and Perquisites
Allowances are additional amount in addition to basic pay to meet specific expenses like DA, HRA and conveyance which may fully taxable, partly taxable and fully exempted.
Perquisites are non-monetary benefits which Anushree used to enjoy when she became a senior manager and that included
- Rent free furnished accommodation
- Club membership fees
- Free medical facilities
- Car provided for personal use
- ESOP
Under the Income Tax Rules, such perquisites are valued monetarily as per provisions and included as part of the salary income.
Profits in lieu of Salary
These are the payments received by the employee from the employer in addition to the salary. It includes any amount due or received in connection with employment. Anushree received a considerable amount as Keyman Insurance Policy Proceeds which was taken by the employer on the life of Anushree and taxable as ‘Profits in lieu of Salary’.
Standard Deduction – Lessen Tax burden
This is the deduction available to all employees irrespective of salary structure but perquisites and allowances depend on job role and position offered. Under the OLD Tax Regime (OTR), a fixed amount of Rs. 50,000 is deducted (FY 2024-25) while this deduction is Rs 75,000 under New Tax Regime (NTR). This deduction is very useful as it’s a tax relief to all the salaried people without any proof or documents.
Professional Tax and Entertainment Allowance
Professional Tax is deductible for all employees while Entertainment Allowance is fully taxable for non-government employees.
Retirement Benefits
Some monetary benefits are made available to the employees on retirement so that they have a steady income flow and enjoy financial security. Anushree retired from service after rending a service of many years and received a lump-sum amount such as Provident Fund, Leave encashment, Gratuity and Pension. These are the example of retirement benefits.
Taxability depends on category of service whether you are government employee or non- government employee and accordingly deductions are claimed as per rules of the Income Tax.
Closing Memo
Understanding take-home salary and CTC is not only fundamental for students irrespective of any background but it’s a life skill for all budding employees who are getting ready for stepping into the corporate world.
Thank you, Dr. Sujit Dutta, for writing “Income from Salary — Decoding the Pay Slip for Tax Beginners.” Your simple storytelling (with Riya’s example) makes complex tax terms like perquisites, allowances, and standard deduction much more approachable. I especially liked how you explained which allowances are fully taxable, partly exempt, or fully exempt — that’s something many articles skip over.
The section on standard deduction and the reminder that no proofs are needed was a great clarity for beginners. I also appreciate how you linked practical payroll elements (like CTC vs take-home) with tax law. Looking forward to more articles that bridge everyday pay slips with tax rules!