Chapter IV - Computation of Total Income
Section 16
Section 16: income from salary
Section 16 gives the inclusive definition of "salary" for the purposes of the salary provisions of this Act. It is deliberately broad, sweeping in not just basic wages but pensions, gratuity, perquisites, unavailed leave payments, and specific fund-related accretions and employer contributions.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
For the purposes of this Part, “salary” includes— (a) wages; (b) any annuity or pension; (c) any gratuity; (d) any fees or commission; (e) perquisites; (f) profits in lieu of, or in addition to, any salary or wages; (g) any advance of salary; (h) any payment received by an employee in respect of any period of leave not availed of by him; (i) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax as per paragraph 6 of Part A of Schedule XI; (j) the aggregate of all sums that are comprised in the transferred balance as referred to in paragraph 11(2) of Part A of Schedule XI of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub-paragraphs (4) and (5) thereof; (k) the contribution made by the Central Government or any other employer in any tax year, to the account of an employee under a pension scheme referred to in section 124; and (l) the contribution made by the Central Government in any tax year, to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme referred to in section 125.
Introduction
Section 16 expands what counts as salary for this Part. Cash wages are only one category: pensions, gratuity, perquisites, certain fund accretions and employer contributions can also enter the salary computation.
Key takeaways
Salary is broadly defined
The salary head includes wages, annuity or pension, gratuity, fees or commission, perquisites, profits in lieu of salary and advance salary.
Certain employment-related contributions
The provision also includes specified provident-fund amounts and employer contributions to the pension and Agniveer schemes, subject to the linked statutory rules.
What "salary" includes
For the purposes of this Part, "salary" includes:
- Wages
- Any annuity or pension
- Any gratuity
- Any fees or commission
- Perquisites
- Profits in lieu of, or in addition to, any salary or wages
- Any advance of salary
- Any payment received by an employee for a period of leave not availed of
- The annual accretion to a recognised provident fund balance, to the extent chargeable to tax under Schedule XI, Part A, paragraph 6
- The transferred balance in a recognised provident fund, to the extent chargeable to tax under Schedule XI, Part A, paragraph 11(4) and 11(5)
- Employer/Central Government contributions to an employee's pension scheme account under section 124
- Central Government contributions to an individual's Agniveer Corpus Fund account under the Agnipath Scheme referred to in section 125
Cash and retirement receipts
Classify wages, fees, commission, pension, gratuity, leave encashment and advance salary under the listed clauses before applying any exemption or timing rule elsewhere.
The inclusion of an item as salary does not by itself establish that the entire amount is taxable; check the applicable exclusion and computation provisions.
Employer-provided value and funds
Identify perquisites and profits in lieu of salary using their linked definitions, then separately review recognised provident-fund and pension-scheme amounts named in clauses (i) to (l).
Keep fund statements and employer contribution details, since the statutory inclusion can be limited by the applicable Schedule or scheme rule.
Step-by-step flow for applying Section 16
- 1
Is the receipt connected with employment?
Section 16 defines what "salary" includes for this Part; when it is chargeable is governed by Section 15.
- No: Consider the other heads of income.
- Yes: Go to the next step.
- 2
Does it fall within any clause of Section 16?
Wages; annuity or pension; gratuity; fees or commission; perquisites; profits in lieu of or in addition to salary; advance of salary; payment for leave not availed; provident fund accretion or transferred balance to the extent taxable under Part A of Schedule XI; employer or Central Government pension contributions under section 124; and Central Government contributions to the Agniveer Corpus Fund under section 125.
- 3
For perquisites and profits in lieu of salary, determine the value
Use the specific provisions on perquisites and profits in lieu of salary to identify and value these items.
- 4
Aggregate and move to computation
Add all included items to arrive at salary, then apply the exemptions and deductions available under the Act.
Practical checklist
Do
- Reconcile payroll, retirement payments, employer benefits and fund statements against the listed salary categories.
- Check any separate exemption or valuation rule before including a benefit at its full face value.
Avoid
- Do not treat salary as limited to monthly wages.
- Do not assume every listed contribution is fully taxable without its referenced rule.
Illustrative example
Worked example: building up salary
Hypothetical facts (illustration only, not a real taxpayer): For a tax year, Ms. Joseph receives from her employer: wages of ₹6,00,000, sales commission of ₹50,000, ₹40,000 for leave not availed, and a perquisite valued (under the perquisite provisions) at ₹30,000. Her employer also contributes ₹60,000 to her account under the pension scheme referred to in section 124. All figures are assumed.
Wages
Included under clause (a): ₹6,00,000.
Commission
Included under clause (d): ₹50,000.
Leave encashment
Payment for leave not availed is included under clause (h): ₹40,000.
Perquisite
Included under clause (e): ₹30,000.
Employer pension contribution
Included under clause (k): ₹60,000.
Total
₹6,00,000 + ₹50,000 + ₹40,000 + ₹30,000 + ₹60,000 = ₹7,80,000.
Outcome
- Her "salary" for the Salaries head is ₹7,80,000 before any exemption or deduction.
- Section 16 only settles what is included; exemptions and deductions under other provisions may reduce the taxable amount.
Glossary
- Perquisite
- An employer-provided benefit whose scope is specified further in Section 17.
- Profits in lieu of salary
- Specified employment-linked payments defined further in Section 18.
Frequently asked questions
Is a bonus part of "salary" under Section 16?
The section's list does not name "bonus" separately, but items like "fees or commission" and "profits in lieu of, or in addition to, any salary or wages" are included - bonus is generally taxed as part of salary income under related provisions such as section 18 (profits in lieu of salary).
Are provident fund and pension contributions part of salary?
Yes, in specified circumstances - the annual accretion to a recognised provident fund (to the extent taxable under Schedule XI), certain transferred provident fund balances, employer/Government contributions to a section 124 pension scheme, and Government contributions to the Agniveer Corpus Fund are all included as salary under this section.
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Talk to our tax team about this sectionLast updated 10 October 2026