# Definition of Salary [Sec 17(1)] and Allowances

## What 'Salary' includes – Section 17(1)

1. Wages

2. Annuity or Pension

3. Gratuity

4. Fees, commission, perquisites or profits in lieu of / in addition to salary

5. Advance of salary

6. Leave salary (leave encashment)

7. Provident Fund – taxable portion of (a) annual accretion to a recognised PF and (b) transferred balance in a recognised PF

8. Pension scheme contributions by Central Government / employer under Section 80CCD

9. Agniveer Corpus Fund contributions by the Central Government under Section 80CCH (Agnipath Scheme)

## Allowances

Allowances are monetary payments for specific expenditures (personal or job-related). Most are taxable unless specifically exempt.

### Fully taxable under both regimes

Entertainment Allowance (Govt employees get a Sec 16 deduction), Dearness, Overtime, Fixed Medical, City Compensatory, Interim, Servant, Project, Tiffin/Lunch/Dinner, Warden, Non-practicing, any other cash allowance, and Transport allowance (to employees other than blind/deaf-dumb/orthopedically handicapped).

### Differential treatment

House Rent Allowance [Sec 10(13A)] – exemption available under the old regime only; fully taxable under the new (default) regime.
Special Allowances [Sec 10(14)] – partly exempt.
Exceptions exempt under BOTH regimes: (a) Travelling allowance, (b) Daily allowance, (c) Conveyance allowance, (d) Transport allowance to blind / deaf-and-dumb / orthopedically handicapped employees (up to ₹3,200 p.m.).

### Fully exempt under the optional (old) tax regime

Allowances to High Court Judges
Salary, allowances and pension paid by the United Nations Organization
Sumptuary allowance to High Court / Supreme Court Judges

### Fully exempt under both regimes

Allowance granted to Indian citizens by the Government for services rendered outside India [Section 10(7)].

Worked example

### Example 1

Transport allowance: A normal employee receives transport allowance — it is fully taxable. But a blind/orthopedically handicapped employee receiving transport allowance is exempt up to ₹3,200 p.m. under both regimes.

### Example 2

HRA across regimes: An employee receiving HRA gets the Sec 10(13A) exemption only if he opts for the old regime; under the default new regime the entire HRA is taxable.

### Example 3

Govt allowance abroad: An Indian citizen posted overseas by the Government receives a foreign allowance — fully exempt u/s 10(7) under both regimes.

⚠️ Common exam mistakes

Claiming HRA exemption under the new (default) regime — it is available only under the old regime.
Exempting transport allowance for all employees — the ₹3,200 p.m. exemption applies only to blind/deaf-dumb/orthopedically handicapped employees.
Forgetting that travelling, daily and conveyance allowances are exempt under BOTH regimes.
Omitting employer/government pension (80CCD) and Agniveer (80CCH) contributions from the definition of salary.

Bare-Act text Section 17(1) · Income-tax Act, 1961 · click to expand

Section 17(1): 'salary' includes — (i) wages; (ii) any annuity or pension; (iii) any gratuity; (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) any advance of salary; (vi) any payment received in respect of any period of leave not availed of by him; (vii) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided; (viii) the aggregate of all sums comprised in the transferred balance in a recognised provident fund, to the extent provided; (ix) the contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme referred to in section 80CCD; (x) the contribution made by the Central Government in the previous year to the Agniveer Corpus Fund account referred to in section 80CCH.

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Section 17 – Definition of Salary & Allowances

Worked example

⚠️ Common exam mistakes