Basis of Charge and Taxable Allowances

Income under the head "Salaries" is charged to tax under Section 15 of the Income Tax Act, 1961, and its precise composition is fixed by the definition of "salary" under Section 17(1). This section sets out when salary becomes chargeable to tax, and then works through every allowance this unit's syllabus names, allowance by allowance, stating exactly how much of each is taxable and how much, if any, is exempt.

Basis of Charge — Section 15

Salary is chargeable to tax on whichever of the following happens EARLIER — the "due" basis or the "receipt" basis:

1. Any salary DUE from an employer (or a former employer) to an assessee in the previous year, whether it has actually been paid or not;
2. Any salary PAID or allowed to the assessee in the previous year, by or on behalf of an employer (or former employer), even though it is not due, or has not become due, by that time; and
3. Any ARREARS of salary paid or allowed to the assessee in the previous year, by or on behalf of an employer (or former employer), if it has not already been charged to tax in any earlier previous year.
   Note

   Why "whichever is earlier" matters

   The "due or receipt, whichever is earlier" rule exists precisely to make sure NO instalment of salary escapes tax and NO instalment of salary is taxed twice. Once a particular amount of salary has been taxed on the due basis (say, salary for March, due on 31st March but actually paid only in April), it cannot be taxed again in the year it is actually received.

   Section 17(1) then defines what "salary" itself includes for this purpose — wages; any annuity or pension; any gratuity; fees, commission, perquisites or profits in lieu of or in addition to salary; any advance of salary; the encashment of leave; the employer's contribution to a recognised provident fund in excess of the prescribed limit; and specified transferred balances and contributions. The remainder of this section, and Section 7.B that follows, works through the individual components of this wide definition that this unit's syllabus specifically names.

Allowances and their tax treatment

An allowance is a fixed monetary amount paid by an employer to an employee, over and above the basic salary, generally to meet a particular kind of expense. Some allowances are fully taxable; others are partly or wholly exempt, subject to conditions and — very often — a fixed rupee ceiling laid down in the Act or the Rules.

Basic Salary

Basic Salary is fully taxable, with no exemption available. It is also the anchor figure many other exemptions in this chapter (HRA, the accommodation-valuation percentages in Section B) are computed as a percentage of.

Dearness Allowance (DA)

Dearness Allowance, paid to help an employee cope with the rising cost of living, is fully taxable, exactly like Basic Salary. DA has one important side-effect worth remembering carefully: if the terms of an employee's employment provide that DA enters into the computation of retirement benefits (such as gratuity or pension), then — and only then — DA is also included in "salary" while computing certain OTHER exemptions in this chapter, most importantly the House Rent Allowance exemption below and the accommodation-valuation percentage in Section B. If DA does NOT form part of retirement benefits under the terms of employment, it is still fully taxable, but it is excluded when computing those other exemptions.

City Compensatory Allowance (CCA)

CCA is paid to compensate an employee for the generally higher cost of living in a large city. It is fully taxable, with no exemption whatsoever — unlike DA, CCA is never treated as part of "salary" for computing any other exemption either.

House Rent Allowance (HRA) — Section 10(13A) read with Rule 2A

HRA is the one allowance in this list that carries a genuine, computed exemption. The amount of HRA exempt from tax is the LEAST of the following three amounts — whatever remains of the HRA actually received, after subtracting this exempt amount, is taxable:

No exemption is available at all if the employee does not actually pay rent, or lives in accommodation they own.

Medical Allowance

A fixed monthly cash allowance paid to an employee regardless of whether — or how much — the employee actually spends on medical treatment is fully taxable, with no exemption. (This is different from the employer directly bearing an employee's medical treatment cost, or reimbursing a medical bill, which is a PERQUISITE rather than an allowance, and is covered separately under "tax-free perquisites" in Section B.)

Bonus

Bonus paid by an employer to an employee is fully taxable, in the year it is actually received, as part of salary.

Children Education Allowance — Section 10(14) read with Rule 2BB

A cash allowance paid to help meet the cost of an employee's children's education is exempt up to ₹100 per month, per child, for a maximum of two children — an amount that has stayed unchanged in the Rules for many years (see the Assessment Year grounding note above). Any amount received above this ₹100-per-child-per-month ceiling, or for a third or later child, is fully taxable.

Transport Allowance — Section 10(14) read with Rule 2BB

For most employees, Transport Allowance paid to meet the cost of commuting between residence and place of duty is, at AY 2026-27, fully taxable with no exemption — the earlier blanket exemption (of ₹1,600 per month) was withdrawn from Assessment Year 2019-20 onward, when the standard deduction for salaried employees was introduced in its place. One category continues to get a specific exemption even today: an employee who is blind, deaf-and-dumb, or orthopedically handicapped with a disability of the lower extremities can claim Transport Allowance exempt up to ₹3,200 per month — any amount received in excess of this ceiling is taxable.

WBCHSE's Costing and Taxation syllabus draws on the very same Income Tax Act, 1961 framework — the same Section 15 basis of charge and the same Section 10(13A)/Section 10(14) allowance-exemption provisions — that CBSE/NCERT Accountancy courses also teach under "Income under the Head Salaries"; only the depth of numerical practice differs from board to board.