Section 19 — Deductions from salaries. Successor to s.10(10), s.10(10A), s.10(10AA), s.10(10B), s.10(10C), s.16 of the 1961 Act.
Section 19 is in Chapter IV — Computation of Total Income, which runs from section 13 to section 95.
Sub-section (1) computes income under the head "Salaries" after the deductions in column B of the Table, capped at the amounts in column C. Entry 1 allows the entire employment tax paid under article 276(2) of the Constitution. Entry 2 is the standard deduction: Rs. 75,000 or the salary, whichever is less, where income-tax is computed under section 202(1); Rs. 50,000 or the salary, whichever is less, in any other case.
Entries 3 to 9 cover gratuity and commuted pension. Death-cum-retirement gratuity as described in sub-section (2)(g), and retiring gratuity under the Pension Code or defence regulations, are deductible in full. Gratuity under the Payment of Gratuity Act, 1972 is deductible as received but restricted to the amount under section 4(2) and (3) of that Act. Any other gratuity on retirement, incapacity or termination is the minimum of the actual gratuity, the amount notified by reference to the Central Government employee limit, and half a month's salary for each completed year of service, built from A, the average salary for the ten months preceding the month of the event, and B, the completed years. Commuted pension under the Civil Pensions (Commutation) Rules or the listed similar schemes is fully deductible (entry 7); commutation from any other employer is limited to the commuted value of one-third of the pension where gratuity was also received, and one-half otherwise, determined by reference to age, health, rate of interest and recognised mortality tables (entry 8); commutation from a fund in Schedule VII (Table: Sl. No. 3) is fully deductible (entry 9).
Entries 10 to 14 cover severance and leave. Retrenchment compensation is the minimum of what was received, the amount under section 25F(b) of the Industrial Disputes Act, 1947, and such amount, not being less than Rs. 50,000, as may be notified; where the compensation is under a Central Government approved scheme, the whole compensation received is deductible. Voluntary retirement or termination compensation under a scheme within sub-section (2)(h) is the minimum of the compensation received and Rs. 5,00,000. Leave encashment is fully deductible for a Central or State Government employee, and for anyone else is the minimum of the cash equivalent of earned leave at credit (entitlement not exceeding thirty days for every year of actual service), ten times the average monthly salary for the ten months preceding retirement, the notified amount, and the actual payment received.
Sub-section (2) supplies the aggregation rules and definitions. Clauses (a) and (f) cap the total deduction for entry 6 gratuity and entry 14 leave encashment across employers and years at the notified limit reduced by what was already exempted or deducted. Clause (b) confines "Salary" for those two entries to pay plus dearness allowance where the terms of employment so provide, excluding all other allowances and perquisites. Clause (c) deems certain closure and transfer payments to be retrenchment compensation and clause (d) borrows "employer" and "workman" from the Industrial Disputes Act, 1947. Clause (e) attaches three conditions to entry 12 — guideline-compliant scheme, one tax year only, and no double claim with section 157 relief. Clause (g) identifies the entry 3 gratuity, and clause (h) lists the ten kinds of employer whose voluntary retirement schemes qualify for entry 12.
Salary is taxed on receipt with almost no scope for expenditure claims, so the Act lists exhaustively, and caps, the sums that may be taken out of it. The one-time terminal payments carry the real relief, and each is capped against the Central Government employee benchmark rather than what a particular employer chose to pay. The aggregation rules exist because these are once-in-a-career payments an employee could otherwise claim afresh at every employer.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Standard deduction, higher amount | Rs. 75,000 or the salary, whichever is less | Where income-tax is computed under section 202(1) | Sub-section (1), Table Sl. No. 2(a) |
| Standard deduction, other cases | Rs. 50,000 or the salary, whichever is less | Any case other than one where income-tax is computed under section 202(1) | Sub-section (1), Table Sl. No. 2(b) |
| Other gratuity ceiling, service limb | Half month's salary for each completed year of service | From A, average salary for the ten months preceding the month of retirement, incapacity or termination, and B, completed years; least of three amounts applies | Sub-section (1), Table Sl. No. 6(c) |
| Commuted pension from any other employer, gratuity also received | Commuted value of one-third of the pension | Pension normally receivable; value fixed by age, health, rate of interest and recognised mortality tables | Sub-section (1), Table Sl. No. 8(a) |
| Commuted pension from any other employer, no gratuity | Commuted value of one-half of the pension | Any case other than Sl. No. 8(a) | Sub-section (1), Table Sl. No. 8(b) |
| Floor for the notified retrenchment compensation limit | Not less than Rs. 50,000 | The notified amount cannot be set below this; least of three amounts applies | Sub-section (1), Table Sl. No. 10(c) |
| Voluntary retirement compensation ceiling | Rs. 5,00,000 | Minimum of compensation received and this amount, for a scheme of an employer in sub-section (2)(h) | Sub-section (1), Table Sl. No. 12(b) |
| Earned leave entitlement recognised | Not more than thirty days for every year of actual service | Cash equivalent limb, for an employee who is not a Central or State Government employee | Sub-section (1), Table Sl. No. 14(a) |
| Salary-based ceiling for leave encashment | Ten times the average monthly salary | Average monthly salary for the ten months preceding retirement; least of four amounts applies | Sub-section (1), Table Sl. No. 14(b) |
From Sl. No. 5 onwards every entry is a ceiling built out of competing amounts and the deduction is the least of them — the amount actually received is almost never the answer. Two entries carry a lifetime rather than an annual limit: gratuity under Sl. No. 6 and leave encashment under Sl. No. 14 are aggregated across employers and years by sub-section (2)(a) and (f), so earlier exemptions or deductions are subtracted from the notified limit before the current claim is measured. The narrow definition of "Salary" in sub-section (2)(b) applies to those same two entries and usually produces a smaller ceiling than an employee expects. The standard deduction turns on which computation applies, and in either case cannot exceed the salary itself.
An employee who is not a Government employee retires after 22 completed years, with an average monthly salary of Rs. 80,000 for the ten preceding months, and receives Rs. 12,00,000 as leave encashment. Sl. No. 14 offers four amounts: the cash equivalent of earned leave capped at 30 days a year, ten times the average monthly salary (Rs. 8,00,000), the notified amount, and the actual Rs. 12,00,000. The least governs, so the salary limb of Rs. 8,00,000 caps him well below what he received, and anything deducted on an earlier leave encashment is subtracted from the notified limit under sub-section (2)(f).
An employee meets this section on the salary computation in the return of income and on the deduction lines of the statement the employer issues after deducting tax; a retiring employee meets it when the employer decides how much of a gratuity, commuted pension, retrenchment or voluntary retirement payment to treat as deductible before releasing the money.
Rs. 75000 or the salary, whichever is less, where income-tax is computed under section 202(1);
"Salary" includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites
where deduction has been allowed to an employee in respect of the said item for any tax year, no deduction thereunder shall be allowed to him in relation to any other tax year
See the full 1961 to 2025 concordance.
All of them are in the Rules 2026 index.
See every circular and notification on this section, or the circulars index.
See every circular and notification on this section, or the notifications index.