Definition of Salary [Sec. 16]
by Under the Income tax Act, 2025, Section 16 deals with the meaning of salary for the purpose of computing income under the head “Salaries.” The term salary has a wider meaning under income tax law than its ordinary meaning. It includes not only basic pay but also various monetary and non monetary amounts received by an employee from the employer or former employer. Salary is taxable when there is an employer employee relationship between the payer and recipient.
For income tax purposes, salary generally includes the following:
| Component | Meaning |
|---|---|
| 1. Wages | Regular payment made by an employer to an employee for services rendered. |
| 2. Annuity | A fixed or periodic amount received by an employee from an employer or former employer under an arrangement. |
| 3. Pension | Periodic payment received after retirement or cessation of employment. |
| 4. Gratuity | Amount received by an employee as a retirement or employment related benefit, subject to applicable exemptions. |
| 5. Fees and Commission | Payments made by an employer to an employee for services or performance, where covered by the salary provisions. |
| 6. Perquisites | Benefits or facilities provided by an employer to an employee, such as accommodation or certain other benefits. |
| 7. Profits in lieu of Salary | Certain amounts received in connection with employment or termination of employment that are treated as salary under the Act. |
| 8. Advance Salary | Salary received before it becomes due is generally taxable in the year of receipt. |
| 9. Leave Encashment | Amount received for unutilised leave, subject to the applicable provisions and exemptions. |
| 10. Annual Accretion to Recognised Provident Fund | Certain specified accretions or contributions may be included as salary under the prescribed conditions. |
A key feature of the definition is that salary includes monetary as well as certain non monetary benefits. However, the taxability of each component depends upon the specific provisions, exemptions and valuation rules applicable to it.