Deductions from Salaries under the Income-tax Act, 2025 – Complete & Practical Guide
Introduction
Under the New Income Tax Act, 2025, income under the head “Salaries” is not taxed on gross receipts. The law clearly provides that salary income shall be computed after allowing specific deductions prescribed under Section 19 read with Sections 15–18 of the Income-tax Act, 2025.
A critical point many taxpayers and even students overlook is that only deductions expressly listed in Section 19 are allowed. No equity, no discretion, no “logical” adjustment beyond the table provided in the Act.
This blog explains all deductions from salaries under the Income-tax Act, 2025, with limits, conditions, and practical interpretation—fully aligned with the new income tax law 2025.
Statutory Framework – Section 19, Income-tax Act, 2025
Section 19 provides a tabular list of deductions that can be claimed while computing income chargeable under the head “Salaries”. These deductions broadly relate to:
- Employment-related statutory payments
- Standard deduction
- Retirement benefits (gratuity, pension, leave encashment)
- Compensation on retrenchment or voluntary retirement
- Special exemptions subject to government-notified limits
If a receipt does not appear in this table, it is not deductible, irrespective of hardship or fairness.
1. Professional Tax (Tax on Employment)
Any sum paid by an employee as tax on employment under Article 276(2) of the Constitution is fully deductible.
Key Point:
- Deduction is allowed only on actual payment basis
- No upper monetary limit under the Income-tax Act, 2025
This deduction continues unchanged under the new Income Tax Act 2025.
2. Standard Deduction – Section 19
The standard deduction is a flat deduction allowed from salary income to simplify taxation.
Amount of Standard Deduction
- ₹75,000 or salary, whichever is less – where tax is computed under Section 202(1)
- ₹50,000 or salary, whichever is less – in all other cases
This provision plays a major role in reducing taxable salary under the new tax regime of the Income-tax Act, 2025.
3. Death-cum-Retirement Gratuity (Government Employees)
Gratuity received under:
- Central Civil Services (Pension) Rules, 2021, or
- Any similar notified government scheme
is fully deductible.
There is no monetary ceiling, making this a complete exemption for government employees under the new income tax law 2025.
4. Gratuity for Defence Services Personnel
Any retiring gratuity received under defence pension regulations is fully deductible, without limits.
This reflects the continued preferential tax treatment for defence personnel under the Income-tax Act, 2025.
5. Gratuity under the Payment of Gratuity Act, 1972
Gratuity received under the Payment of Gratuity Act, 1972 is deductible to the extent calculated under Sections 4(2) and 4(3) of that Act.
Important:
- Deduction is restricted, not automatic
- Any excess over statutory calculation becomes taxable
6. Other Gratuity (Non-Government Employees)
Gratuity received by private employees, PSU employees, or others not covered above is deductible to the least of:
- Actual gratuity received
- Amount notified by the Central Government
- ½ month’s average salary × completed years of service
Salary for this purpose includes DA only if employment terms allow it.
Also, aggregate limits apply if gratuity is received from multiple employers or across years.
7. Commutation of Pension – Government & Specified Employees
Any commuted pension received by:
- Central or State Government employees
- Defence services
- All-India services
- Employees of local authorities or statutory corporations
is fully deductible under the Income-tax Act, 2025.
8. Commutation of Pension – Other Employees
For employees other than government employees, deduction depends on whether gratuity is received:
- ⅓ of pension – if gratuity is received
- ½ of pension – if gratuity is not received
The commuted value is calculated using actuarial factors like age, health, interest rate, and recognised mortality tables.
9. Commuted Pension from Specified Funds
If pension is commuted from a fund specified in Schedule VII, the entire amount is deductible.
10. Retrenchment Compensation
Compensation received at the time of retrenchment under:
- Industrial Disputes Act, 1947
- Any law, standing orders, award, or contract
is deductible to the minimum of:
- Actual compensation received
- Amount calculated under Section 25F(b) of the Industrial Disputes Act
- Amount notified by the Central Government (not less than ₹50,000)
Closure or transfer of undertaking may also qualify as retrenchment under specified conditions.
11. Retrenchment under Government-Approved Schemes
If retrenchment compensation is received under a Central Government-approved scheme, the entire amount is deductible.
12. Voluntary Retirement Scheme (VRS)
Amount received on voluntary retirement or termination under approved schemes is deductible to the least of:
- Actual amount received
- ₹5,00,000
Critical Conditions:
- Deduction is allowed only once in a lifetime
- If relief under Section 157 is claimed, deduction is not allowed again
13. Leave Encashment – Government Employees
Cash equivalent of earned leave received by Central or State Government employees at retirement is fully deductible.
14. Leave Encashment – Non-Government Employees
Deduction is restricted to the least of:
- Actual leave encashment received
- 10 months’ average salary
- Amount notified by Central Government
- Leave entitlement (maximum 30 days per completed year)
Aggregate limits apply if received from multiple employers.
Important Interpretational Rules under Section 19
- Salary includes DA only if employment terms provide
- Aggregate caps apply across years for gratuity and leave encashment
- Once a deduction is claimed in one year, it may not be available again
- Definitions of “employer” and “workman” follow the Industrial Disputes Act
- Relief and deduction cannot be claimed simultaneously for the same receipt
| Sl. No. | Nature of Deduction | Allowable Deduction (One-line clarity) |
|---|---|---|
| 1 | Professional Tax | Entire amount actually paid |
| 2 | Standard Deduction | ₹75,000 (new regime u/s 202(1)) or ₹50,000, whichever applicable |
| 3 | Death-cum-retirement gratuity (Govt.) | Fully deductible |
| 4 | Defence services gratuity | Fully deductible |
| 5 | Gratuity under Payment of Gratuity Act | As per Act limits |
| 6 | Other gratuity (non-Govt.) | Least of: actual received, notified limit, or ½ month salary × completed years |
| 7 | Commuted pension (Govt./specified services) | Fully deductible |
| 8 | Commuted pension (others) | ⅓ of pension if gratuity received, else ½ |
| 9 | Commuted pension from specified fund | Fully deductible |
| 10 | Retrenchment compensation | Least of: actual, ID Act amount, or notified minimum (≥ ₹50,000) |
| 11 | Retrenchment under approved scheme | Fully deductible |
| 12 | Voluntary Retirement / Termination | Least of: amount received or ₹5,00,000 |
| 13 | Leave encashment (Govt.) | Fully deductible |
| 14 | Leave encashment (non-Govt.) | Least of: actual, 10 months avg salary, notified limit |
Conclusion
The Income-tax Act, 2025 has retained a structured, rule-based approach to deductions from salaries. While the new income tax law 2025 simplifies some aspects, it leaves no room for interpretation outside Section 19.
For correct salary computation, one must:
- Identify the nature of receipt
- Apply the correct statutory limit
- Track past deductions
- Verify employee category
Ignoring these fundamentals leads to incorrect returns, disallowances, and litigation.
