Salaried employee? Here’s how your CTC will be taxed.

CTC Income Tax Calculation for Salaried Employees

A salaried employee’s CTC in a private company is made up of several components. Basic Salary, House Rent Allowance (HRA), Dearness Allowance, Conveyance Allowance, Entertainment Allowance, medical allowances, Provident Fund, food allowance, and so on are examples of these benefits. The CTC components differ from one organisation to the next, depending on the perks or allowances/benefits it offers its employees.

According to the terms of the Income Tax Act, 1961, some of these components are entirely taxable or fully exempt, and others enjoy a partial exemption.

Under section 10[14] of the Income Tax Act, allowances such as Daily allowance, Uniform allowance, and Research allowance are tax-free. Perquisites, on the other hand, are typically taxed in a certain way under the IT Act.

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Take, for example, the Employee Stock Option Plan (ESOP) — an employee benefit plan that allows employees to own stock in a company. Employees are frequently offered shares at a lower price than Fair Market Value. The difference between the two prices will be taxable as perquisite u/s 17(2)(vi) of the IT Act if such ESOP options are granted to employees.

 how various components of CTC are charged in an email exchange with FE Online. Take a look at this:

Basic Salary

Basic wage is always taxed in full.


If a taxpayer receiving House Rent Allowance (HRA) pays rent for residential housing, he can claim exemption under section 10[13A], subject to the lower of the following indicated limits, i.e.

  • The amount actually received
  • 50% of pay if residing in a metropolis (e.g., Mumbai, Delhi, Chennai, and Kolkata), and 40% of salary in all other circumstances.
  • Rent equal to or greater than 10% of pay
income tax

Salary would be defined as basic salary plus Dearness allowance [if it is part of retirement benefits] and commission received on the basis of turnover for the purpose of calculating the exempt HRA amount.

If a taxpayer receives HRA but does not pay rent, the entire amount of HRA is taxable.

Pay that fluctuates

Variable pay is the percentage of an employee’s salary that is based on their performance and is completely taxed.

Reimbursement (transportation, books and newspapers/periodicals, mobile, entertainment, and so on.)

Allowances given to employees for official purposes are exempt from tax under section 10(14) of the IT Act, provided that such expenses are genuinely incurred by employees. To claim exemption, the employee needs have the applicable bills and vouchers.

As a result, the conveyance allowance is exempt to the extent of the expense. Similarly, reimbursement for books, newspapers, and periodicals may be claimed as an exemption under section 10(14), although reimbursement for mobile phone charges is exempt under Rule 3(7)(ix) of the IT Rules.

In the case of private employees, however, entertainment allowance is entirely taxable. If such an entertainment allowance is given to employees to compensate expenses for the hospitality of the company’s clients, it can be claimed as an exemption under section 10(14) of the IT Act.

Allowance for travel while on leave (LTA)

The taxpayer must meet the following conditions in order to claim an exemption with respect to Leave Travel Allowance/Concession u/s 10(5):

  • The taxpayer makes the actual journey.
  • Only domestic travel is taken into account when claiming this exemption.
  • Employees alone or with their families are eligible for an exemption; family members include the employee’s spouse, children, dependent parents, siblings and sisters. However, more than two children born after October 1, 1998 are not eligible for the exemption. Furthermore, this restriction is unaffected in cases of multiple births on a second occasion after having one child.
  • The LTA exemption can only be used twice in a four-year period, for a total of two journeys (2022-2025). The amount of the exemption varies depending on the manner of travel. In the event of air travel, for example, the lesser of actual expenses incurred or economy class fare would be permitted.


Bonus is fully taxable


If you receive a gratuity during your work, it is entirely taxable. Gratuity received at the time of retirement, on the other hand, would be taxed differently depending on whether or not the employer is covered by the Payment of Gratuity Act.

  • The least of the following is exempt u/s 10(10) of the IT Act if the employer is covered under the Payment of Gratuity Act:
  • The amount actually received
  • A sum of Rs. 20,00,000
  • 15 days salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months (i.e. 15/26 * Salary p.m. * Years of Service Completed)

Salary would be defined as Basic Salary p.m. plus Dearness Allowance for the purposes of the aforementioned calculation.

The least of the following is exempt if the employer is not covered by the Payment of Gratuity Act.

  • Amount actually received
  • 20,00,000 rupees
  • Half month’s compensation for each completed year of service. (i.e. 12 * Average Salary p.m. * Years of Service Completed) Any fraction of a year will be discarded when computing completed years.

Average Salary p.m. would entail Average Basic Salary of the last 10 months + Dearness allowance of the last 10 months [if it forms part of retirement benefits] and Average Commission paid on the basis of turnover of the last 10 months.