CMA Intermediate – Salary Chapter
(Super-Compact Notes for Exam)
1. Basic Conditions for Taxability under "Salaries"
• Employer-Employee relationship is mandatory.
• Payment must be in the capacity of employer.
• Salary can be in cash or kind.
• If not fulfilling above, taxable under "Other Sources" or "Business/Profession".
2. Basis of Charge [Sec 15]
• Taxable on Due or Receipt basis, whichever is earlier.
• Advance Salary – Taxable in year of receipt.
• Arrears – Taxable in year of receipt (Relief u/s 89 possible).
• Salary paid tax-free → Gross up and add.
3. Components of Salary [Sec 17(1)]
• Basic Salary, Wages
• Pension, Annuity
• Gratuity, Bonus, Commission
• Fees, Advance Salary
• Leave Encashment, Employer contribution to RPF/NPS
4. Deductions from Salary [Sec 16]
• Standard Deduction: ₹50,000
• Entertainment Allowance (Govt. Employee): Least of 3 items
• Professional Tax: Amount actually paid
5. Retirement Benefits – Exemption Summary
Gratuity:
• Govt: Fully Exempt
• Pvt: Least of Actual / ₹20L / Formula (15/26 × Salary × Years)
Leave Encashment:
• Govt: Fully Exempt
• Pvt: Least of Actual / ₹25L / 10×Avg Salary / Formula
Pension:
• Uncommuted: Fully Taxable
• Commuted: Govt – Fully Exempt; Others – 1/3 (if gratuity) or 1/2 (if no gratuity)
6. House Rent Allowance (HRA) – Sec 10(13A)
Exempt = Least of:
• Actual HRA Received
• Rent Paid – 10% of Salary
• 50% Salary (metro) / 40% (non-metro)
Salary = Basic + DA (if part of retirement) + % Commission on sales
7. Allowance Cheat Sheet
Exempt Allowances (Limit Based):
• Children Education: ₹100 p.m. per child (max 2)
• Hostel Allowance: ₹300 p.m. per child (max 2)
• Transport (Disabled only): ₹3,200 p.m.
• Travel/Conveyance: Least of actual or amount spent
Fully Taxable:
• Medical, Servant, City Compensatory, Tiffin, etc.
8. Perquisites – Taxability Basics
• Rent-Free House, Car, ESOPs → Taxable
• Medical Facility (up to limit), Uniform → May be Exempt
• Employer-paid tax → Gross up to salary (except for non-monetary perqs)
9. Profits in Lieu of Salary
• Termination compensation
• Amount received after resignation
• Payment from URPF, Keyman policy, etc.
→ Advance Salary – Taxable in the year of receipt.
→ Arrears of Salary – Taxable in the year of receipt. Relief under Section 89 may be claimed.
→ Salary paid tax-free by employer – Grossed up and added to salary income.
5. Deductions under Section 16 (Old Regime Only)
1. Standard Deduction [Sec. 16(ia)] – ₹50,000 flat deduction.
2. Entertainment Allowance [Sec. 16(ii)] – Allowed only to Government employees (Least of:
₹5,000 / 20% of basic / actual).
3. Professional Tax [Sec. 16(iii)] – Amount actually paid is allowed.
6. Allowances – Tax Treatment
• Fully Taxable: Medical, Servant, Tiffin, City Compensatory Allowance.
• Partially Exempt under Sec. 10(14):
- Education Allowance: ₹100 p.m. per child (max 2)
- Hostel Allowance: ₹300 p.m. per child (max 2)
- Transport Allowance (disabled employees): ₹3,200 p.m.
• HRA Exemption under Sec. 10(13A): Least of
a) Actual HRA Received
b) Rent Paid – 10% of Salary
c) 50% (metro) or 40% (non-metro) of Salary
7. Perquisites [Sec. 17(2)] – Taxability Summary
• Rent-Free Accommodation, Motor Car, ESOP – Taxable.
• Medical Facility, Uniform Allowance – May be exempt subject to limits.
• Employer’s payment of tax on non-monetary perquisites – Exempt u/s 10(10CC).
8. Retirement Benefits – Gratuity, Leave, Pension
• Gratuity [Sec. 10(10)]:
- Govt Employees: Fully Exempt.
- Non-Govt: Least of Actual, ₹20 Lakh, or 15/26 × Salary × Completed Years.
• Leave Encashment [Sec. 10(10AA)]:
- Govt Employees: Fully Exempt.
- Others: Least of Actual, ₹25 Lakh, 10× Avg Salary, or (Completed Yrs – Leave Taken) × Avg
Salary.
• Pension [Sec. 10(10A)]:
- Uncommuted Pension: Fully Taxable.
- Commuted:
→ Govt: Fully Exempt.
→ Others:
• 1/3 Exempt (if gratuity received)
• 1/2 Exempt (if gratuity not received)
9. Profits in Lieu of Salary [Sec. 17(3)]
• Compensation on termination/modification of employment terms.
• Amount received before or after employment.
• Keyman Insurance Policy proceeds.
• Employer payments not covered under other exemptions.
10. Common Working Note Formats (for problems)
Gratuity = 15/26 × Salary × Completed Yrs (round off 6+ months up)
Leave Encashment = (Completed Yrs – Leave Taken) × Avg Salary (last 10 months)
HRA = Least of (Actual HRA, Rent – 10% Salary, 50% or 40% of Salary)
Pension (Commuted) = 1/3 or 1/2 of total pension amount (as applicable)
