Section 17 Income Tax Act: Salary, Perquisites and Profits in Lieu of Salary
The law governing salary, perquisites and profits in lieu of salary changed structurally from 1 April 2026. What was substantially contained in Section 17 of the Income-tax Act, 1961 is now distributed across Sections 16, 17 and 18 of the Income-tax Act, 2025.
Current legal position from 1 April 2026
| Subject | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Salary definition | Section 17(1) | Section 16 |
| Perquisites | Section 17(2) | Section 17 |
| Profits in lieu of salary | Section 17(3) | Section 18 |
This page keeps its existing URL because it is a useful reference to the former Section 17, but the explanation below follows the law currently in force and clearly identifies the corresponding provisions.
What is salary under Section 16 of the Income-tax Act, 2025?
Section 16 uses an inclusive definition. This means that salary is not confined to basic pay. Subject to the other provisions of the Act, it includes the following kinds of employment income:
- wages;
- annuity or pension;
- gratuity;
- fees or commission;
- perquisites;
- profits in lieu of, or in addition to, salary or wages;
- advance salary;
- payment for leave not availed of, commonly called leave encashment;
- taxable annual accretion and transferred balances relating to a recognised provident fund, as provided by the Act;
- contribution by the Central Government or another employer to an employee's pension-scheme account referred to in Section 124; and
- Central Government contribution to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme referred to in Section 125.
What is a perquisite under Section 17 of the Income-tax Act, 2025?
A perquisite is an employment-related benefit or amenity that falls within Section 17. Depending on the nature of the benefit and the applicable valuation rules, its taxable value can form part of salary income.
Section 17 includes, among other items:
- rent-free accommodation provided by the employer;
- accommodation provided at a concessional rate;
- specified benefits or amenities provided free of cost or at a concessional rate to covered employees;
- specified securities or sweat equity shares allotted or transferred by a current or former employer free of cost or at a concessional rate;
- other prescribed benefits or amenities;
- an employee's personal obligation paid by the employer;
- specified employer payments for life assurance or an annuity;
- aggregate employer contributions above Rs. 7,50,000 in a tax year to the specified retirement funds or schemes covered by Section 17(1)(h); and
- prescribed annual accretion relating to such taxable excess contributions.
Important exclusions
Section 17 also contains exclusions for specified medical and related benefits, subject to statutory conditions. It also excludes qualifying expenditure on an employee's journey between residence and office or other place of work from the perquisite provision specified in the section. The precise treatment depends on the statutory provision and the applicable Income-tax Rules, 2026.
Employer-provided residential accommodation
Residential accommodation is a common taxable perquisite. Under the current Income-tax Rules, 2026, valuation depends on factors such as whether the employer is Government or another employer, whether the property is owned or leased by the employer, the population of the city, whether the accommodation is furnished, rent recovered from the employee and, where applicable, the rule limiting valuation when the same accommodation continues for more than one tax year.
Unfurnished accommodation for employees of non-Government employers
| Accommodation | General valuation basis |
|---|---|
| Employer-owned property in a city with population above 40 lakh | 10% of salary, subject to the applicable rule and reduction for rent paid by the employee |
| Employer-owned property in a city with population above 15 lakh but not above 40 lakh | 7.5% of salary, subject to the applicable rule and reduction for rent paid by the employee |
| Employer-owned property in another city | 5% of salary, subject to the applicable rule and reduction for rent paid by the employee |
| Property taken on lease or rent by employer | Lower of actual lease rent paid or payable and 10% of salary, subject to the applicable rule and reduction for rent paid by the employee |
Population bands use the 2011 Census framework. Furnished accommodation requires an additional valuation for furniture or fixtures under the applicable rule.
What are profits in lieu of salary under Section 18?
Section 18 of the Income-tax Act, 2025 covers specified receipts connected with employment that are treated as profits in lieu of salary. Broadly, these include:
- compensation due to or received from an employer or former employer in connection with termination of employment or modification of employment terms;
- amounts due to or received from a person before joining employment with that person or after cessation of employment; and
- specified payments from an employer, former employer, provident or other fund, and amounts under a Keyman insurance policy, subject to the statutory exclusions and conditions.
A receipt falling within this provision may still require examination of an applicable exemption, exclusion or computation rule elsewhere in the Act.
Earlier Section 17 of the Income-tax Act, 1961
Before 1 April 2026, Section 17 of the Income-tax Act, 1961 brought the three concepts together in one provision:
Section 17(1): Salary. It included wages, annuity or pension, gratuity, fees, commissions, perquisites, profits in lieu of salary, advance salary, leave encashment, specified recognised provident fund amounts, employer contribution to the pension scheme referred to in former Section 80CCD, and Central Government contribution to the Agniveer Corpus Fund under former Section 80CCH.
Section 17(2): Perquisite. It covered rent-free or concessional accommodation, specified benefits and amenities, employer-paid obligations, specified insurance or annuity payments, ESOP or sweat equity benefits, excess specified retirement-fund contributions and related accretions, and other prescribed fringe benefits or amenities, subject to statutory exclusions.
Section 17(3): Profits in lieu of salary. It covered specified termination or modification compensation, certain employer or fund payments, Keyman insurance receipts, and amounts received before joining or after cessation of employment.
The old provision should not be applied automatically to a current tax year. For matters straddling the change in law, the repeal, savings and transition provisions of the Income-tax Act, 2025 should be checked.
How salary and perquisites are dealt with in practice
For tax computation, the employee should identify cash salary, taxable allowances, taxable perquisites and profits in lieu of salary, then apply the exemptions, exclusions and deductions available under the law governing the relevant tax year. Employers also have salary tax-deduction and reporting obligations.
Under the Income-tax Rules, 2026, Form No. 123 replaces the earlier Form No. 12BA for the prescribed statement of perquisites, other fringe benefits or amenities and profits in lieu of salary. It operates with Section 392(5)(a) of the Income-tax Act, 2025 and the relevant 2026 Rules.
Official Income Tax resources
- Income-tax Act, 2025 and Income-tax Rules, 2026 - Income Tax Department
- Section 17 - Perquisite - Income-tax Act, 2025
- Income from Salary guidance - Income Tax Department
Official resources should be checked for amendments, notifications and rules applicable to the particular tax year and facts.