Tag: Section 16

Dearness Allowance (DA): Meaning, Tax Treatment and the 60% Rate from January 2026

Posted on by CA Meet Dhrangadhariya

Last updated: 13 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Dearness allowance (DA) is paid on top of basic pay to offset inflation. It is fully taxable as salary.
  • DA counts as “salary” for HRA, gratuity and leave encashment limits only if the terms of employment provide for it.
  • For Central Government employees and pensioners the Cabinet approved a 2% rise from 58% to 60% with effect from 01/01/2026, with arrears for January to March 2026.
  • Arrears of DA taxed in a later year can qualify for relief under section 157 by filing Form 39.

Dearness allowance (DA) is the part of pay that moves with the price level. It is paid by the Central and State Governments, public sector bodies and some private employers, as a percentage of basic pay, so that the real value of pay is not eaten away by inflation. Pensioners receive the same relief as dearness relief (DR).

The current rate for Central Government employees

The Union Cabinet approved an additional 2% DA and DR with effect from 01/01/2026, taking the rate from 58% to 60% of basic pay and pension. Employees and pensioners get arrears for January, February and March 2026 (SCC Online, 20/04/2026). The Centre revises DA twice a year, with effect from 1 January and 1 July, based on the All-India Consumer Price Index for industrial workers. State governments announce their own rates and dates.

For central employees the DA is paid on basic pay: a basic pay of ₹56,100 at 60% gives DA of ₹33,660 a month.

Tax treatment of DA

  • Taxable in full as salary. Under section 16 of the Income-tax Act, 2025, “salary” includes wages, and DA is part of wages. It has no exemption of its own. DR on pension is taxed as pension, which is also salary.
  • Report it as salary. It forms part of the salary shown in your TDS certificate (Form 130) and in the return, and should match your payslip.
  • Arrears. DA revised with retrospective effect is paid as arrears, for example the January to March 2026 arrears above. Taxed in the year of receipt, it can push you into a higher slab. If so, relief under section 157 is available by furnishing Form 39 (see our post on relief for arrears of salary).

Where DA counts as “salary” for other limits

Several limits are worked out on “salary” rather than on pay as a whole. The Act and Rules say that salary includes dearness allowance if the terms of employment so provide, and excludes all other allowances and perquisites:

Use Where
HRA exemption (old regime): 50% or 40% of salary, and rent paid less 10% of salary Rule 279
Gratuity: half a month’s salary for each completed year (employees not covered by the gratuity law) Section 19(2)(b)
Leave encashment: ten months’ average salary Section 19(2)(b)

If your terms of employment do not provide for DA to count, it is left out of these calculations. For a government employee the pay rules usually do count it. Check the appointment letter or the service rules rather than assume.

Example: basic pay ₹60,000 and DA ₹36,000 (60%), HRA received ₹30,000 a month, rent paid ₹35,000 a month, Mumbai, old regime. Salary for HRA is ₹96,000 (the terms of service include DA). The exempt HRA is the least of the HRA received (₹30,000), rent paid less 10% of salary (35,000 - 9,600 = ₹25,400) and 50% of salary (₹48,000), so ₹25,400 a month.

DA and HRA are different

Point Dearness allowance House rent allowance
Purpose Offsets rising prices Helps with rent
Paid to Government and public sector employees mainly, some private employers Most employers
Tax Fully taxable Exempt in part under the old regime, limited by Rule 279
Based on Basic pay Basic pay (and DA where the terms provide)

DA for pensioners

Pensioners get DR on the pension at the same rate as the Central DA, and the DR is taxed with the pension as salary.

Before you rely on this

  • The Cabinet decision is the source for the 60% rate. Confirm the rate from the Department of Expenditure order that applies to you, and from your State government’s order if you are a State employee.
  • The revision due from 01/07/2026 is expected to be announced later in the year, so the rate shown here may change with retrospective effect and arrears.

Frequently asked questions

What is dearness allowance?

An allowance paid on top of basic pay to compensate for rising prices. It is calculated as a percentage of basic pay and revised from time to time.

Is dearness allowance taxable?

Yes. It is wages, and so part of salary under section 16 of the Income-tax Act, 2025, and is fully taxable in the year it is due or received, subject to the usual deductions.

Is DA part of salary for HRA and gratuity?

Yes, if the terms of employment so provide. Rule 279 (HRA) and section 19(2)(b) (gratuity and leave encashment) both say “salary” includes dearness allowance if the terms of employment so provide, but excludes other allowances and perquisites.

What is the DA rate for Central Government employees now?

60% of basic pay from 01/01/2026, up from 58%, as approved by the Union Cabinet in April 2026. The revision due from 01/07/2026 had not been announced when this was checked on 06/10/2026.

Do private employees get DA?

Not as a rule. Government and public sector employees receive it. Some private employers and wage settlements also pay a dearness allowance or variable DA, and the same tax rules apply.

What is dearness relief?

The equivalent of DA for pensioners. It is paid on pension and is taxable as pension, which is part of salary.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

How to Calculate Income From Salary: Step by Step With Example (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 05 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Income from salary is worked out in four steps: add everything that counts as salary (section 16), subtract the exempt allowances, add taxable perquisites, then subtract the section 19 deductions.
  • Section 19 allows the standard deduction (₹75,000 new regime, ₹50,000 old), professional tax (old regime) and retirement items such as gratuity and leave encashment within their limits.
  • Chapter VIII deductions (section 123 and others) are subtracted afterwards, in the old regime only.
  • Employers deduct TDS on salary under section 392 and issue Form 130 by 15 June; check it against your AIS before filing.

Income from salary is the first and usually the largest head of income for an employee. This post shows how it is worked out under the Income-tax Act, 2025 and then how tax is calculated on it, with a full example under both regimes.

Step 1: add up what counts as salary

Section 16 of the Act says salary includes:

  • wages (basic pay, dearness allowance, allowances, bonus),
  • any annuity or pension,
  • any gratuity,
  • any fees or commission,
  • perquisites (rent-free accommodation, a car for personal use, free shares and others in section 17),
  • profits in lieu of salary (section 18), such as compensation on termination,
  • any advance of salary,
  • any payment for leave not availed of (leave encashment),
  • the taxable annual accretion to a recognised provident fund, and
  • the employer’s contribution to the notified pension scheme (NPS).

Under section 15, salary due to you in the tax year is chargeable whether paid or not, salary paid in advance is chargeable in the year it is paid, and arrears paid in the year are chargeable if not taxed earlier. So salary that is due but unpaid at year end is still income of that year.

Step 2: take out exempt allowances

Some allowances are exempt in part or full, within limits, under Schedule III and Rule 279. The best known is house rent allowance (old regime only). It is exempt to the extent of the least of the HRA received, the rent paid less 10% of salary, and 50% of salary in Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru (40% elsewhere), where salary is basic pay plus dearness allowance if the terms provide. Leave travel concession and some others are also old regime items. See our posts on allowances for each.

Step 3: add the taxable perquisites

Free or concessional accommodation, a car, free meals above the limit, loans at a low rate, gifts above the limit, and shares allotted under an ESOP or RSU are valued under Rule 15 and added. See our posts on perquisites and ESOP taxation.

Step 4: subtract the deductions from salary (section 19)

Deduction Amount Regime
Professional tax The whole amount Old only
Standard deduction ₹75,000, or the salary if less New
Standard deduction ₹50,000, or the salary if less Old
Death-cum-retirement gratuity of government employees The whole amount Both
Gratuity of other employees Within the limits in our gratuity post Both
Leave encashment on retirement Government employees: the whole amount. Others: the least of the cash equivalent of leave at credit (up to 30 days for each year of service), ten times the average monthly salary of the last ten months, the notified limit and the amount received Both
Voluntary retirement payment The least of the amount received and ₹5,00,000, subject to the conditions in section 19(2)(e) Both
Retrenchment compensation to a workman The least of three amounts in the Table Both

The result is income from salary. If you received arrears or advance salary that pushes you into a higher slab, claim relief under section 157 with Form 39.

Step 5: from income from salary to taxable income

Add income from other heads (house property, other sources and so on), set off losses and then, in the old regime only, subtract the Chapter VIII deductions: section 123 (up to ₹1,50,000), your own NPS contribution up to ₹50,000, health insurance, education loan interest, donations and others. The new regime allows only a few of these, mainly the employer’s NPS contribution. The balance is total income.

Step 6: apply the rates

New regime (section 202), tax year 2026-27: up to ₹4,00,000 nil; 5% to ₹8,00,000; 10% to ₹12,00,000; 15% to ₹16,00,000; 20% to ₹20,00,000; 25% to ₹24,00,000; 30% above. Rebate under section 156(2) of up to ₹60,000 if total income is up to ₹12,00,000.

Old regime: up to ₹2,50,000 nil; 5% to ₹5,00,000; 20% to ₹10,00,000; 30% above. Rebate of up to ₹12,500 if total income is up to ₹5,00,000. Higher basic exemption limits apply for resident senior citizens.

Then add surcharge if income is above ₹50 lakh, and 4% health and education cess.

Worked example

Basic ₹6,00,000, HRA ₹3,00,000, special allowance ₹4,50,000, bonus ₹1,50,000. Employee’s PF ₹72,000. Rent paid ₹3,30,000 a year in Pune. Professional tax ₹2,400. Other qualifying investments ₹78,000.

Item Old regime (₹) New regime (₹)
Gross salary 15,00,000 15,00,000
Less: HRA exemption (least of 3,00,000; 3,30,000 - 60,000 = 2,70,000; 50% of 6,00,000 = 3,00,000) 2,70,000 Not available
Less: professional tax 2,400 Not available
Less: standard deduction 50,000 75,000
Income from salary 11,77,600 14,25,000
Less: section 123 (PF 72,000 + others 78,000) 1,50,000 Not available
Total income 10,27,600 14,25,000
Tax on slabs 1,20,780 93,750
Add: cess at 4% 4,831 3,750
Tax payable 1,25,611 97,500

The new regime costs ₹28,111 less for this employee because the deductions (₹4,72,400 in all: HRA, professional tax, standard deduction and section 123) are below the break-even for a ₹15 lakh salary. See our post on saving tax by salary level.

TDS on salary

The employer deducts tax on salary under section 392(1) at the average rate on your estimated income for the year, after taking into account the evidence you give in Form 124 (Rule 205) and details of other income and previous employment (Form 122). It can adjust later months for any excess or shortfall (section 392(5)(c)). The employer pays the tax to the government and issues Form 130 by 15 June after the end of the year (Rule 215).

Documents you need to file the return

  1. Form 130, the TDS certificate for salary.
  2. AIS and the TDS statement on the e-filing portal, to reconcile TDS and any interest or other income.
  3. Rent receipts, landlord’s PAN, investment and loan statements for the old regime claims.
  4. Form 123, if the employer gives perquisite details separately.

If Form 130 and your AIS differ, ask your employer to correct the TDS return before you file, or report the figures you are able to support.

Frequently asked questions

What is included in salary for income tax?

Wages, any annuity or pension, gratuity, fees or commission, perquisites, profits in lieu of salary, advance salary, payment for leave not availed of, and certain provident fund and pension scheme items (section 16 of the Income-tax Act, 2025).

What deductions are allowed from salary?

Under section 19(1): professional tax (old regime only), the standard deduction (₹75,000 new regime, ₹50,000 old regime), and retirement items such as gratuity, leave encashment and commutation of pension within their limits.

Is the standard deduction available in both regimes?

Yes. It is ₹75,000 or the salary, whichever is less, in the new regime, and ₹50,000 or the salary, whichever is less, in the old regime.

Which form shows my salary and TDS?

Form 130, the TDS certificate for salary under section 395. The employer must furnish it by 15 June after the end of the tax year (Rule 215).

Do I need Form 124?

Give your employer Form 124 with evidence of HRA, LTA, home loan interest and Chapter VIII claims so that TDS is deducted on the right income (section 392(5)(b), Rule 205).

Where do I report salary in the return?

In the salary schedule of the return, using Form 130 and the figures in your AIS. Reconcile any difference before filing.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

CTC, Gross Salary, Basic Salary and Take-Home Pay Explained (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 23 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • CTC (cost to company) is what the employer spends on you in a year; gross salary is the pay before deductions; basic salary is the fixed core of it; take-home is what reaches your bank.
  • “Salary” for income tax is wider than the payroll word: section 16 includes wages, pension, gratuity, commission, perquisites, leave encashment and more.
  • Basic plus dearness allowance (if the terms provide) is the base for gratuity and the HRA exemption, so a low basic changes more than the payslip.
  • Employer’s PF, NPS and superannuation contributions are tax free up to ₹7.5 lakh a year in total; the new regime gives a ₹75,000 standard deduction.

A job offer quotes a CTC, the payslip shows a gross salary, and the bank credit is much smaller. These terms are payroll language, not tax law, and employers use them a little differently. This post fixes the meaning of each, shows how they fit together, and explains what the Income-tax Act, 2025 calls salary.

The four numbers

Term Meaning
CTC (Cost to Company) The total yearly cost of you to the employer: pay, allowances, variable pay, the employer’s PF contribution, the gratuity provision, insurance and other benefits
Gross salary The pay credited or due to you before any deduction: basic, HRA, allowances, variable pay
Basic salary The fixed core of gross salary, without allowances, bonus or perquisites
Take-home (net) pay Gross salary less your PF contribution, professional tax, TDS and other deductions

Gross salary is roughly CTC less the employer’s PF and the gratuity provision, because those are costs to the employer that you do not receive as monthly pay. Check your offer letter, since some employers show variable pay and benefits differently.

What “salary” means for income tax

Under section 16 of the Income-tax Act, 2025, “salary” includes:

  • wages,
  • any annuity or pension,
  • any gratuity,
  • any fees or commission,
  • perquisites,
  • profits in lieu of, or in addition to, salary or wages,
  • any advance of salary,
  • any payment for leave not availed of (leave encashment),
  • the taxable annual accretion to a recognised provident fund and certain transferred balances,
  • the employer’s contribution to the notified pension scheme (NPS).

Tax is then charged on the net salary after the deductions in section 19: the standard deduction (₹75,000, or the salary if less, under the new regime; ₹50,000 under the old regime), professional tax (old regime only) and the retirement and exempt items such as gratuity.

Some payments in the CTC are not in your taxable salary at all. The employer’s contribution to a recognised provident fund, the notified pension scheme and an approved superannuation fund is a perquisite only to the extent the total is above ₹7,50,000 in a year (section 17(1)(h)).

Why basic salary matters more than it looks

Basic salary, together with dearness allowance if the terms of employment provide for it, is the base used for several things:

  • Provident fund: the usual contribution is a percentage of basic plus dearness allowance.
  • Gratuity: worked out on the last drawn monthly wages, which include basic and dearness allowance (see our post on gratuity).
  • HRA exemption (old regime only): the least of the HRA received, the rent paid less 10% of salary, and 50% of salary in Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad and Bengaluru (40% elsewhere). Here “salary” means basic pay plus dearness allowance if the terms provide, and excludes all other allowances and perquisites (Rule 279).

A low basic with a large special allowance cuts the PF and gratuity base and the HRA exemption, while a high basic increases all three but also raises your PF deduction and reduces your monthly take-home. Neither is right for everyone; there is no legal percentage of CTC.

Worked example (tax year 2026-27, new regime)

CTC is ₹21,00,000 a year.

Component Amount (₹)
Basic 8,40,000
HRA 3,36,000
Special allowance 6,32,800
Variable pay 1,50,000
Gross salary 19,58,800
Employer’s PF (12% of basic) 1,00,800
Gratuity provision 40,400
CTC 21,00,000

Tax under the new regime (section 202):

  • Gross salary 19,58,800 less standard deduction 75,000 = taxable income ₹18,83,800. (Professional tax is not deductible in the new regime, and the employer’s PF is within the ₹7.5 lakh limit.)
  • Tax: 5% on ₹4,00,000 to ₹8,00,000 = 20,000; 10% on ₹8,00,000 to ₹12,00,000 = 40,000; 15% on ₹12,00,000 to ₹16,00,000 = 60,000; 20% on ₹16,00,000 to ₹18,83,800 = 56,760. Total ₹1,76,760.
  • Add 4% cess of ₹7,070 = ₹1,83,830. No rebate applies as income is above ₹12 lakh.

Take-home pay:

Item Amount (₹)
Gross salary 19,58,800
Less: employee’s PF (12% of basic) 1,00,800
Less: professional tax (assumed) 2,400
Less: income tax with cess 1,83,830
Take-home for the year 16,71,770
Per month about 1,39,314

The employer’s PF and gratuity are outside gross salary but inside CTC, which is why take-home looks far below the headline figure.

Practical points

  • Ask for the break-up of CTC in writing, including what is fixed, what is variable and what is a benefit that may never be paid out in cash.
  • Variable pay shown in CTC is paid only when targets are met. Count only the fixed part when you plan your monthly budget.
  • Reimbursements and perquisites should be checked against Rule 15 and the new limits (meals ₹200 a meal, gifts ₹15,000). See our post on perquisites.
  • If you can choose between regimes, compare both with your actual HRA, 80C and similar deductions.

Frequently asked questions

What is the full form of CTC?

Cost to Company. It is the total yearly cost of an employee to the employer: pay, allowances, bonus, employer’s PF, gratuity and any benefits.

What is the difference between CTC and gross salary?

CTC includes costs that are not paid to you as salary, such as the employer’s PF and the gratuity provision. Gross salary is what is paid to you before deductions, so it is CTC less those items.

How do I get from gross salary to take-home pay?

Deduct your own PF contribution, professional tax, TDS and any other deductions such as insurance or NPS that your employer recovers.

What percentage of CTC is basic salary?

There is no legal percentage. Employers commonly keep it around 40% to 50% of CTC. A higher basic raises PF, gratuity and the HRA exemption base, but also increases the pay that is fully taxable.

What does “salary” include for income tax?

Under section 16 of the Income-tax Act, 2025: wages, any annuity or pension, gratuity, fees or commission, perquisites, profits in lieu of salary, advance salary and leave encashment, along with certain provident fund and pension scheme items.

Is the standard deduction available in the new regime?

Yes, ₹75,000 or the salary, whichever is less, under the new regime. In the old regime it is ₹50,000 (section 19(1), serial 2).

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.