Section 16 of the Income-tax Act, 2025 defines what salary includes: wages, annuity or pension, gratuity, fees or commission, perquisites, profits in lieu of salary, advance salary, leave encashment, taxable provident fund accretions, and employer contributions under sections 124 and 125.
What section 16 does
Section 15 tells you when salary is taxed. Section 16 tells you what salary is. It is an inclusive definition running from clause (a) to clause (l), which means the list is illustrative rather than exhaustive — something that is salary in the ordinary sense stays salary even if it is not named.
The most useful thing about the new drafting is that it is a flat list. The 1961 Act carried the same ground in section 17(1), but the perquisite and profits-in-lieu definitions were bundled into the same section as sub-sections (2) and (3). The Income-tax Act, 2025 splits them into three sections — 16, 17 and 18 — so each can be cited on its own.
Two clauses are worth noticing because they did not exist in this form in the older law: clause (k) brings in employer contributions to the pension scheme referred to in section 124, and clause (l) brings in the Central Government's contribution to the Agniveer Corpus Fund under the Agnipath Scheme referred to in section 125.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 17(1) | Definition of 'salary' | 16 |
| 17(2) | Definition of 'perquisite' | 17 |
| 17(3) | Definition of 'profits in lieu of salary' | 18 |
| 80CCD | Pension scheme contributions | 124 |
| 80CCH | Agnipath Scheme contribution | 125 |
Section 16 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Clauses (a) to (h) — the conventional components
Salary includes wages; any annuity or pension; any gratuity; any fees or commission; perquisites as defined in section 17; profits in lieu of, or in addition to, salary or wages as defined in section 18; any advance of salary; and any payment received in respect of leave not availed of, which is how leave encashment enters the computation.
Clauses (i) and (j) — provident fund amounts
Clause (i) brings in the annual accretion to the balance credited to an employee in a recognised provident fund, to the extent it is chargeable under paragraph 6 of Part A of Schedule XI. Clause (j) brings in the transferred balance referred to in paragraph 11(2) of the same Part, to the extent chargeable under sub-paragraphs (4) and (5). Both are the mechanism by which excess or non-qualifying provident fund amounts become salary rather than escaping tax.
Clause (k) — employer contribution to the pension scheme
The contribution made by the Central Government or any other employer in a tax year to an employee's account under the pension scheme referred to in section 124 is salary. It is included first and then dealt with as a deduction under section 124, which is why it appears on both sides of a payslip computation.
Clause (l) — the Agniveer Corpus Fund
The Central Government's contribution in a tax year to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme referred to in section 125 is salary. The matching deduction sits in section 125.
Worked example
Consider an employee in tax year 2026-27 whose payslip and annual statements show the following.
| Component | Amount | Salary under section 16? |
|---|---|---|
| Basic pay and dearness allowance | ₹9,60,000 | Yes — clause (a), wages |
| Performance commission | ₹1,20,000 | Yes — clause (d), fees or commission |
| Rent-free accommodation, valued as prescribed | ₹1,80,000 | Yes — clause (e), perquisite under section 17 |
| Leave encashment while in service | ₹40,000 | Yes — clause (h) |
| Employer NPS contribution under the section 124 scheme | ₹96,000 | Yes — clause (k) |
| Reimbursement of actual travel on office work | ₹25,000 | No — not a personal benefit |
Gross salary under section 16 is ₹13,96,000. The section 124 deduction for the employer's pension contribution is then claimed separately in Chapter VIII, and the section 19 deductions — including the standard deduction — are applied to arrive at income chargeable under the head.
Compliance checklist and due dates
- Map every payslip component to a clause of section 16 before deciding it is outside salary; the list is inclusive, not exhaustive.
- Employer pension contributions under section 124 and Agniveer Corpus Fund contributions under section 125 must be included in salary first, then claimed as deductions.
- Provident fund accretions require a reading of Schedule XI, Part A — paragraph 6 for annual accretion and paragraph 11(2) for transferred balance.
- Reimbursement of actual business expenditure is not salary; a fixed allowance generally is. Keep the documentation that shows which is which.
Common mistakes
- Treating section 16 as the deduction section. Under the 1961 Act section 16 gave deductions; under the 2025 Act deductions are section 19 and section 16 is the definition.
- Leaving employer pension contributions out of gross salary because a deduction is available for them. They are included by clause (k) and deducted separately.
- Assuming leave encashment is always exempt. Clause (h) includes it in salary; the deduction, and its ceiling, come from the section 19 table.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.