Section 16 Income Tax Act 2025: What Is Included in Salary?
Section 16 defines what is included in salary for the salary provisions of the Income-tax Act, 2025. It covers much more than basic pay: pensions, gratuity, employee benefits, advance salary and specified retirement-fund amounts can also fall within the definition.
What does Section 16 mean by income from salary?
For the purposes of Part B (Salaries) of Chapter IV, Section 16 states that salary includes twelve categories listed in clauses (a) to (l). The word "includes" makes the definition inclusive. The existence of an employer-employee relationship generally determines whether a receipt is assessed under the head "Salaries". Section 15 deals with the timing of taxation, while Sections 17 and 18 explain perquisites and profits in lieu of salary.
Section 16: Statutory inclusions explained
Regular wages and basic remuneration paid for employment are salary.
Annuities and pension payments are included in the definition. The treatment of particular retirement receipts depends on the relevant exemption and other provisions.
Gratuity received in connection with employment falls within the definition of salary, subject to any available statutory exemption.
Employment-related fees or commission, including incentive-based remuneration, are included.
Non-cash and other employment benefits may constitute salary. Section 17 contains the detailed definition of perquisites and the relevant valuation framework.
Specified compensation and other payments connected with employment may be treated as profits in lieu of salary; Section 18 sets out the relevant meaning.
Salary received before it becomes due is included. Section 15 prevents the same advance salary from being included again when it later becomes due.
Leave encashment is included in salary, although exemptions may apply in appropriate cases.
The annual accretion to the credit of an employee in a recognised provident fund is included only to the extent chargeable to tax under paragraph 6 of Part A of Schedule XI.
Specified sums in the transferred balance referred to in paragraph 11(2) of Part A of Schedule XI are included to the extent chargeable under its applicable sub-paragraphs (4) and (5).
Contribution by the Central Government or another employer during a tax year to an employee's account under the pension scheme referred to in Section 124 is included. Any available deduction or limit must be considered separately.
The Central Government's contribution during a tax year to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme referred to in Section 125 is included; applicable deduction and exemption provisions require separate examination.
How does Section 16 interact with other provisions?
- Section 15: Determines when salary is chargeable, including due, advance and arrears of salary.
- Section 17: Defines perquisites, including specified employer-provided benefits.
- Section 18: Defines profits in lieu of salary.
- Section 19: Governs deductions from salary income.
- Schedule XI, Part A: Relevant to taxable recognised provident fund accretions and transferred balances.
- Sections 124 and 125: Concern specified pension-scheme and Agnipath Scheme deductions.
Practical illustrations
Example 1: Basic pay plus commission
An employee receives basic pay and sales commission from an employer. Both are covered by Section 16; the taxable amount is determined after applying other relevant provisions.
Example 2: Leave encashment on retirement
Leave encashment is within Section 16(h), but this does not by itself mean the entire receipt is taxable. The applicable exemption must be checked.
Example 3: Recognised provident fund
Not every addition to a recognised provident fund automatically becomes taxable salary. Clauses (i) and (j) apply only to the extent made chargeable under the specified rules in Schedule XI.
Frequently asked questions
Is pension included in salary under Section 16?
Yes. Clause (b) expressly includes annuity or pension. Its ultimate tax treatment depends on the nature of the receipt and applicable exemptions.
Are employer-provided perquisites part of salary?
Yes. Clause (e) includes perquisites. Section 17 and applicable rules determine their scope and valuation.
Is advance salary taxed twice?
No. Section 15(3) prevents salary already included in total income on advance receipt from being included again when due.
Does Section 16 allow the standard deduction?
No. Section 16 defines salary components; deductions from salary are dealt with under Section 19 of the 2025 Act.
Is a partner's remuneration salary?
Under Section 15(4), salary, bonus, commission or remuneration received by a partner from the firm is not regarded as salary for that section.
Official statutory reference
Read the official Income-tax Act, 2025, as amended for the operative wording of Section 16, Sections 15 and 17 to 19, and Schedule XI. For tax compliance and filing, consult the Income Tax e-Filing Portal.
Last reviewed: 10 November 2026. This article is general legal information and should be read with applicable rules, notifications and facts of the case.