## Meaning of "Salary" for Various Purposes

The definition of salary changes depending on what you are computing. This is one of the most heavily tested traps in the Salaries chapter, so commit the four definitions below to memory.

### 1. For Rent Free Accommodation (RFA)

```

Salary = Basic + D.A. (for retirement benefits) + Any Commission + Bonus

+ Taxable portion of allowances

```

This is the widest definition.

### 2. For RPF contribution u/s 17(1), VRS u/s 10(10C), Gratuity (Act NOT applicable) u/s 10(10)(iii), Leave Encashment u/s 10(10AA) and HRA u/s 10(13A)

```

Salary = Basic + D.A. (for retirement benefits) + Commission (as a % of turnover)

```

Note: only turnover-based commission enters here — not a fixed/flat commission.

### 3. For Gratuity where the Payment of Gratuity Act IS applicable

```

Salary = Basic + D.A. (any — whether or not it forms part of retirement benefits)

```

### 4. For Retrenchment Compensation

```

Wages = All monetary payments (except Bonus) + Allowances + Value of RFA

+ LTC + Commission

```

---

## Deductions / Exemptions NOT allowed under the Default Tax Regime [Section 115BAC]

Under the default (new) regime, the following salary-related benefits are forfeited:

Helper allowance, Uniform allowance, Research/Academic allowance
Allowances for Judges; salaries and pensions paid by the UNO
Rent-free official residence to Judges
Leave Travel Concession [Section 10(5)]
House Rent Allowance [Section 10(13A)]
Special allowances for personal expenses [Section 10(14)(ii)] — except transport allowance for the differently-abled
Entertainment allowance and professional tax [Section 16(ii) & (iii)]
Exemption for free food / non-alcoholic beverages / vouchers up to ₹50 per meal [Rule 3]

> Key contrast: Entertainment allowance deduction [Sec 16(ii)] and professional tax deduction [Sec 16(iii)] are available only if the employee opts for the Optional (old) regime. Professional tax paid/reimbursed by the employer is first added to salary and then allowed as a deduction under Section 16.

Worked example

### Example 1

Identifying the right 'salary' for HRA: Mr. A has Basic ₹40,000 p.m., D.A. ₹10,000 p.m. (50% forming part of retirement benefits), and commission of ₹5,000 p.m. (a fixed commission, not based on turnover). For HRA exemption, salary = Basic + D.A. (retirement portion) + commission as % of turnover. Here the commission is fixed (not turnover-based), so it is excluded. Monthly salary for HRA = 40,000 + (50% × 10,000) + 0 = ₹45,000.

⚠️ Common exam mistakes

Including fixed/flat commission in 'salary' for HRA, gratuity (Act not applicable), leave encashment etc. — only commission computed as a percentage of turnover counts there.
Using 'Basic + D.A. (retirement benefits) + commission' for gratuity when the Payment of Gratuity Act IS applicable — in that case salary = Basic + entire D.A.
Claiming entertainment allowance deduction or professional tax deduction under the default regime — these are available only under the optional/old regime.
Adding bonus while computing 'wages' for retrenchment compensation — bonus is specifically excluded.

Reference: Section 115BAC; Section 16(ii) & (iii); Section 17(1) — Income-tax Act, 1961

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Meaning of 'Salary' for different purposes and deductions disallowed under the default regime (115BAC)

Worked example

⚠️ Common exam mistakes