Section 16 of the Income-tax Act, 2025 — What "Salary" Includes (Definition of Salary)

In plain language

What Section 16 says in plain English

Section 16 of the Income-tax Act, 2025 (in force from 1 April 2026) gives the inclusive definition of "salary". It does not tax anything on its own — that job belongs to Section 15 (the charging section). Instead, Section 16 tells you what all counts as salary so that nothing paid by an employer for your job escapes tax. It is the direct successor of Section 17(1) of the old Income-tax Act, 1961, reorganised for the new law.

The word "includes" is important. The list is not exhaustive — anything you receive from an employer because of your employment is salary, whether paid in cash or kind, whether called "pay", "allowance", "bonus" or something else.

The 11 things salary includes

• Wages — your basic pay and everything paid for services rendered.
• Annuity or pension — regular payments after retirement from a former employer.
• Gratuity — the lump sum paid on retirement/leaving (exemption is separately given under Section 19-related provisions).
• Fees or commission — including sales commission or director sitting fees linked to employment.
• Perquisites — non-cash job benefits (rent-free house, car, free education, interest-free loans). These are valued in detail under Section 17.
• Profits in lieu of salary — compensation on termination, keyman insurance amounts, etc., detailed under Section 18.
• Advance of salary — taxed in the year received (but not a loan against future salary).
• Leave encashment — payment for leave not availed (exemption available under Section 19 mechanics for certain employees).
• Taxable RPF accretion — the annual increase in a Recognised Provident Fund balance that becomes taxable per Schedule XI.
• Employer contribution to a notified pension scheme — under Section 124 (the NPS-type scheme; old Section 80CCD route).
• Central Government contribution to the Agniveer Corpus Fund — for Agnipath scheme personnel (old Section 80CCH linkage).

Who it applies to

Section 16 applies to every person taxed under the head "Salaries" — salaried employees in the private and government sectors, directors who are employees, and pensioners (a pension is salary in the hands of the retiree). There must be an employer-employee relationship; a professional or consultant who is not an employee is taxed under "Profits and gains of business or profession", not here.

Key conditions and interactions

• Cash or kind: value received in kind is salary and is measured under the perquisite rules.
• Provident fund limits: under current rules, employer contribution to RPF above 12% of salary, and the aggregate employer contribution to PF + NPS + superannuation exceeding ₹7.5 lakh a year, become taxable; the interest/accretion on that excess is also taxable. Interest on an employee's own PF contribution above ₹2.5 lakh a year is taxable too.
• Deductions come later: Section 16 fixes gross salary; Section 19 then allows the standard deduction (₹75,000 under the new regime, ₹50,000 under the old), professional tax and certain retirement reliefs.

Practical implications

Because the definition is so wide, employees cannot avoid tax by relabelling pay as "reimbursement" or "gift" — if it flows from employment, it is salary. It also means advance salary is taxed now, arrears when received (with Section 89 relief separately). Employers must correctly classify every payment for TDS under Section 192, and employees should reconcile Form 16 against this definition.