Income from Salary: What Goes into the Computation
Chapter Eighteen
Syllabus topic 5, "Income from Salary – Section 15, 16 and 19"
Pages 50 to 52 of 239
In one line
Section 16 defines what salary includes - twelve items, from wages to an employer's contribution to a pension account - and it is the checklist for building up gross salary.
Why the law has this
Section 15 charges "salary" but does not say what salary is. Employers pay in many forms: wages, a pension, a commission, a house, shares, a contribution to a fund. Section 16 gathers them so that the form of the payment does not decide the tax.
The provision itself
16. 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 chargeable under paragraph 6 of Part A of Schedule XI;
(j) the aggregate of all sums comprised in the transferred balance ... to the extent chargeable 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.
The checklist, in the order you should use it
| Clause | Item | Note |
|---|---|---|
| (a) | Wages | The basic pay |
| (b) | Annuity or pension | Including from a former employer, s.15(2) |
| (c) | Gratuity | Included here, then deducted under s.19 to the extent allowed |
| (d) | Fees or commission | Whether a fixed sum or a percentage of turnover |
| (e) | Perquisites | Valued under s.17 |
| (f) | Profits in lieu of, or in addition to, salary | Defined in s.18 |
| (g) | Advance of salary | Consistent with s.15(1)(b) |
| (h) | Payment for leave not availed of | Leave encashment; the deduction is in s.19 |
| (i) | Annual accretion to a recognised provident fund | To the extent in Sch. XI Pt A para 6 |
| (j) | Transferred balance | To the extent in para 11(4) and (5) |
| (k) | Employer's contribution to a section 124 pension scheme | Deduction available under s.124 |
| (l) | Central Government contribution to the Agniveer Corpus Fund | Deduction available under s.125 |
"Includes", not "means". The definition is inclusive, so a payment by an employer to an employee that is not in the list may still be salary.
The three-step shape of every salary computation
The section is a definition, so it does not by itself compute anything. Every salary answer has the same three steps, and section 16 is the first:
Income from Salary: What Goes into the Computation
- Build gross salary using the twelve clauses of section 16, adding the value of perquisites computed under section 17 and profits in lieu under section 18.
- Leave out what is exempt: allowances under Schedule III, read with section 11.
- Take the deductions in section 19: professional tax, the standard deduction, and the tables that cover gratuity, commuted pension, retrenchment compensation, voluntary retirement and leave encashment.
Gratuity and leave encashment are in gross salary first. Clauses (c) and (h) put them in; section 19 takes out what is allowed. A student who omits them from gross salary and then also claims the deduction has counted the relief twice.
Worked example
Classify each receipt of an employee for the tax year 2026-27.
| Receipt | In gross salary? | Clause or provision |
|---|---|---|
| Basic pay | Yes | s.16(a) |
| Commission on sales | Yes | s.16(d) |
| Rent-free flat provided by the employer | Yes, as a perquisite valued under s.17 | s.16(e) |
| Pension from a former employer | Yes | s.16(b) with s.15(2) |
| Encashment of unavailed leave on retirement | Yes, then deducted to the extent s.19 allows | s.16(h) |
| Employer's contribution to the section 124 pension account | Yes | s.16(k) |
| Remuneration received by a partner from his firm | No | s.15(4): not salary at all |
| A gift from a personal friend who is not the employer | No | Not from an employer |
| Remuneration received by a Member of Parliament or of a State Legislature | No | There is no employer and no contract of service; it is charged under other sources |
| Examination remuneration received by a teacher for setting or assessing papers | No | Paid for a separate engagement, not for services under the contract of employment; other sources |
| Compensation for the termination of the employment, or for a change in its terms | No | Charged under other sources by s.92(2)(j) |
Those last three are the ones examiners set, and they are set as traps because the money looks like pay and comes from something that looks like an employer.
A Member of Parliament is not an employee of anybody. He holds an office under the Constitution, and there is no master and servant relationship, so section 15 cannot reach the remuneration and it falls to the residual head.
A teacher paid for examinership is a harder case and the answer is the same. He is an employee of his college for teaching; setting or assessing an examination paper for the University is a separate engagement, and the fee is not paid to him in his capacity as an employee. It is charged under other sources.
The principle behind all three: salary requires an employer-employee relationship and a payment made in that capacity. Take either away and the receipt leaves this head.
Income from Salary: What Goes into the Computation
What it does NOT mean
Section 16 does not exempt anything. It only includes. Every exemption is in a Schedule and every deduction in section 19.
It is not a list of taxable amounts. Gratuity is in the list and is largely relieved by section 19; the clause puts it in charge, the deduction takes it out.
It is not confined to a current employer. Clause (b) and section 15(2) reach a former employer.
A receipt from someone who is not the employer is not salary merely because it relates to the work.
Quick revision
- s.16 clauses (a) to (l): wages; annuity or pension; gratuity; fees or commission; perquisites; profits in lieu; advance of salary; payment for leave not availed; provident fund accretion; transferred balance; employer's s.124 pension contribution; Government's Agniveer Corpus Fund contribution.
- The definition is inclusive.
- Three steps: gross salary (s.16 with s.17 and s.18), then exempt allowances (Schedule III), then deductions (s.19).
- Gratuity and leave encashment go in first, and come out through s.19.
Test yourself
1. Name any six items included in salary by section 16. Wages; any annuity or pension; any gratuity; any fees or commission; perquisites; profits in lieu of or in addition to salary. Others are advance of salary, payment for leave not availed, provident fund accretion and transferred balance, the employer's pension contribution under section 124, and the Government's contribution to the Agniveer Corpus Fund.
2. Is the definition of salary exhaustive? No. Section 16 says salary "includes", so it is inclusive.
3. Where is leave encashment dealt with? It is included in salary by section 16(h), and the deduction is given by the table in section 19(1) at serial numbers 13 and 14.
4. Is a perquisite part of salary? Yes, by section 16(e); its value is computed under section 17.
Answer in one sentence
What does salary include? Under section 16 it includes wages, any annuity or pension, any gratuity, any fees or commission, perquisites, profits in lieu of or in addition to salary, any advance of salary, payment for leave not availed of, the annual accretion and transferred balance in a recognised provident fund to the extent chargeable under Part A of Schedule XI, the employer's contribution to a pension scheme referred to in section 124, and the Central Government's contribution to the Agniveer Corpus Fund under the Agnipath Scheme.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.