## What 'Salary' Includes — Section 17(1)

The term salary is an inclusive definition. It covers:

1. Wages

2. Annuity or Pension

3. Gratuity

4. Fees, Commission, Perquisites, or Profits in lieu of salary (in addition to, or in place of, salary/wages)

5. Advance of Salary

6. Leave Salary (leave encashment)

7. Provident Fund — (a) the taxable portion of the annual accretion to a Recognised PF, and (b) the transferred balance in an RPF to the extent taxable

8. Pension Scheme Contributions — employer/Central Government contribution to an employee's pension scheme u/s 80CCD

9. Agniveer Corpus Fund Contributions — Central Government contribution under the Agnipath Scheme u/s 80CCH

## Allowances — Classification by Tax Treatment

Allowances are monetary payments by the employer for specific expenditure (personal or job-related). They are part of wages/salaries and most are taxable unless a specific exemption applies. The crucial exam skill is sorting each allowance into the right bucket — note that treatment often differs between the Default Tax Regime (DTR / new regime, 115BAC) and the Optional Tax Regime (OTR / old regime).

### Bucket 1 — Fully Taxable under BOTH regimes

Dearness Allowance, Overtime Allowance, Fixed Medical Allowance
City Compensatory Allowance, Interim Allowance, Servant Allowance
Project Allowance, Tiffin/Lunch/Dinner Allowance, Warden Allowance
Non-practising Allowance, Any other cash allowance
Entertainment Allowance (but a deduction is available to Government employees under OTR)
Transport allowance to an employee other than a blind/deaf-and-dumb/orthopaedically handicapped employee

### Bucket 2 — Differential treatment between regimes

House Rent Allowance [10(13A)] — exemption available only under OTR; fully taxable under DTR
Special Allowances [10(14)] — see separate topic
Exceptions partly exempt under BOTH regimes: (a) Travelling allowance, (b) Daily allowance, (c) Conveyance allowance, (d) Transport allowance to blind/deaf-and-dumb/orthopaedically handicapped employee (exempt up to ₹3,200 p.m.)

### Bucket 3 — Fully Exempt only under OTR

(i) Allowances to High Court Judges; (ii) Salary, allowances and pension from the United Nations Organisation; (iii) Sumptuary allowance to High Court / Supreme Court Judges

### Bucket 4 — Fully Exempt under BOTH regimes

Allowances granted by the Government to a citizen of India for services rendered outside India — Section 10(7).

Worked example

### Example 1

Classifying allowances. An employee in the new (default) regime receives Dearness Allowance ₹50,000, HRA ₹1,20,000 and Transport allowance to a blind employee ₹5,000 p.m. Under DTR: DA fully taxable; HRA fully taxable (10(13A) exemption is OTR-only); transport allowance to the blind employee exempt up to ₹3,200 p.m. (irrespective of regime), so ₹3,200 × 12 = ₹38,400 exempt and the balance taxable.

⚠️ Common exam mistakes

Allowing HRA exemption under the default/new tax regime — it is available only under the optional (old) regime.
Treating transport allowance for a NON-disabled employee as exempt — it is fully taxable; only the blind/deaf-and-dumb/orthopaedically handicapped get the ₹3,200 p.m. exemption.
Forgetting that travelling, daily and conveyance allowances remain partly exempt under BOTH regimes (they are official-duty exceptions).

Reference: Section 17(1) — Income-tax Act, 1961

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Definition of Salary & Classification of Allowances [Section 17(1)]

Worked example

⚠️ Common exam mistakes