Salary and employment · Tax Year 2025-26
Salary structure explained: what is taxable
Your salary has a basic pay, allowances, perquisites and sometimes retirement benefits. Some parts are fully taxable, some partly exempt, and some depend on your regime. This guide shows how gross salary becomes taxable salary.
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Your salary income is built in steps: gross salary (salary plus perquisites plus profits in lieu of salary), less exempt allowances, gives net salary; less the standard deduction and other deductions from salary gives income from salary. Some allowances are exempt only under the old regime, and the new regime allows very few.
The figures below are for the tax year 2025-26. The section numbers are those of the Income-tax Act, 1961. TaxCare carries the same limits into the tax year 2026-27 as provisional values, not yet signed off against the Income-tax Act, 2025.
From CTC to taxable salary
CTC (cost to company) is what the employer spends on you. It often includes the employer's PF contribution, gratuity provision and insurance, which you do not receive monthly. Your Form 16 shows what the employer actually reports as salary. Use it, not the offer letter, when you file.
The parts of a typical pay slip
Component | Usually taxable? | Note |
|---|---|---|
Basic pay | Yes | The base for HRA and NPS limits |
Dearness allowance | Yes | Counts toward HRA limits in some cases |
House rent allowance | Partly exempt (old regime only) | Lowest of three limbs |
Special allowance | Yes | Fully taxable |
Leave travel concession | Exempt up to limits (old regime only) | Conditions apply |
Bonus, commission, arrears | Yes | Taxable in the year received |
Perquisites (car, rent-free house, ESOP value) | Yes | Valued by rules |
Employer NPS (80CCD(2)) | Deduction, not exempt | Up to a percentage of salary |
House rent allowance
Under the old regime the exempt part of HRA is the lowest of three amounts:
- The HRA you actually received.
- Rent paid less 10% of basic salary plus dearness allowance.
- 50% of basic plus dearness allowance if you live in Delhi, Mumbai, Kolkata or Chennai, or 40% elsewhere.
TaxCare also applies a cap of one-third of salary.
Example. Basic plus dearness allowance is ₹4,00,000 for the year. HRA received is ₹1,80,000. Rent paid is ₹2,40,000. You live outside the four metros.
- Limb 1: ₹1,80,000.
- Limb 2: ₹2,40,000 − ₹40,000 = ₹2,00,000.
- Limb 3: 40% of ₹4,00,000 = ₹1,60,000.
- Exempt HRA: ₹1,60,000. The remaining ₹20,000 of HRA is taxable.
Under the new regime, HRA exemption is nil.
Retirement benefits
Benefit | Exempt up to (TaxCare rules, 2025-26) |
|---|---|
Gratuity, non-government employee | ₹20,00,000 |
Gratuity, government employee | Fully exempt |
Leave encashment at retirement, non-government employee | ₹25,00,000 |
Retrenchment compensation | ₹5,00,000 |
Voluntary retirement compensation | ₹5,00,000 |
Exemptions are also bounded by the salary itself and by the conditions in the Act such as years of service and the pay last drawn. Your employer works out the exempt part; check it on your Form 16.
Regime matters
Under the new regime, these exemptions are nil: leave travel concession, HRA, the prescribed allowances under section 10(14), and certain others. Gratuity, leave encashment, retrenchment and voluntary retirement exemptions continue.
One new-regime allowance remains: transport allowance for a person with disability, up to ₹38,400 a year.
Deductions from salary
After net salary, these deductions apply:
- Standard deduction: ₹50,000 (old) or ₹75,000 (new).
- Entertainment allowance: government employees, old regime only.
- Professional tax: old regime only.
See our guide on the standard deduction for salaried people and pensioners.
Perquisites and profits in lieu of salary
Perquisites are benefits in kind: a company car, a rent-free house, loans at low interest, stock options when exercised. They are added to salary. Profits in lieu of salary include things like compensation on termination. Your employer reports both in Form 16. Check them against your AIS and Form 26AS (to 2025-26) or Form 168 (from 2026-27).
The value of each perquisite is set by rules, so use the figure your employer reports in Form 16.
Two jobs in a year
If you changed jobs, add the salary from both employers. You get the standard deduction once, not twice, and TDS credit from each employer is claimed in the return. Compare each Form 16 with your TDS statement.
A short example
Salary (sections 17(1) to 17(3)): ₹9,00,000. Exempt HRA (old regime): ₹1,60,000.
- Net salary: ₹7,40,000.
- Standard deduction (old): ₹50,000.
- Income from salary: ₹6,90,000.
Under the new regime: no HRA exemption, so net salary is ₹9,00,000, less ₹75,000 standard deduction, giving ₹8,25,000. Which regime is better depends on your other deductions.
How TaxCare helps
TaxCare brings in your salary and TDS from the portal data, then helps you check them against your Form 16. It works out HRA and the other exemptions, applies the right caps for your regime and shows the tax under both. Nothing is submitted without your approval.
This guide gives general information and is not professional tax advice.
Questions on this topic
Is the full CTC taxable?
Not necessarily. CTC can include employer contributions and benefits that are not paid to you in hand. Salary taxed as income is the gross salary plus perquisites and profits in lieu of salary, less exempt allowances and deductions.
Is HRA taxable?
Partly. In the old regime the HRA exemption is the lowest of three limbs. In the new regime, there is no HRA exemption.
Is Leave Travel Concession exempt?
In the old regime, subject to conditions. In the new regime, it is nil.
Is gratuity taxable?
Gratuity is exempt up to a limit. On TaxCare's rules it is ₹20,00,000 for non-government employees, and a government employee's gratuity is fully exempt.
Is employer NPS contribution taxable?
The employer's contribution to NPS is deductible under 80CCD(2) up to 14% of salary in the new regime, and 10% (14% for government employers) in the old regime.
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