A Comparative Analysis of Salary Definition: Income Tax Bill, 2025 vs. Income-tax Act, 1961

Clause 16 Income from salary.

Income Tax Bill, 2025

1. Introduction

The proposed Income Tax Bill, 2025, through its Clause 16, seeks to redefine and restructure the definition of "salary" as compared to the existing Section 17(1) of the Income-tax Act, 1961. This analysis examines the key changes, implications, and potential impact of the proposed modifications.

2. Objective and Purpose: 

The primary objective appears to be:

• Streamlining the definition of salary
• Providing greater clarity through separate categorization
• Incorporating modern compensation components
• Ensuring better tax compliance and administration

3. Detailed Analysis of Changes

3.1 Structural Changes

• The new Clause 16 presents a more organized structure with 12 distinct sub-clauses (a) to (l)
• Section 17(1) of the 1961 Act contains 9 sub-clauses (i) to (ix)
• The new structure separates previously combined elements (like fees, commissions, perquisites) into individual categories

3.2 Key Modifications

1. Separation of Components:

• Current Act: Sub-clause (iv) combines "fees, commissions, perquisites or profits"
• Proposed Bill: Separates these into distinct categories: * Sub-clause (d): Fees or commission * Sub-clause (e): Perquisites * Sub-clause (f): Profits in lieu of salary

2. Leave Encashment:

• Current Act: Included as sub-clause (va)
• Proposed Bill: Moved to sub-clause (h) with identical language

3. Provident Fund Provisions:

• Current Act: References "Fourth Schedule"
• Proposed Bill: References "Schedule XI" but maintains similar substance

4. Pension Scheme Contributions:

• Current Act: References Section 80CCD
• Proposed Bill: References Section 124, indicating structural reorganization

3.3 New Additions/Modifications

1. Agniveer Corpus Fund: Both versions include provisions for contributions to the Agniveer Corpus Fund

• Current Act: Section 80CCH reference
• Proposed Bill: Section 125 reference

4. Practical Implications

4.1 For Employers

• Clearer categorization of salary components
• Simplified compliance structure
• Better segregation of different types of payments

4.2 For Employees

• More transparent classification of salary components
• Better understanding of taxable components
• Clearer distinction between different types of benefits

4.3 For Tax Administration

• Enhanced clarity in classification
• Reduced scope for misinterpretation
• Better alignment with modern compensation structures

5. Comparative Analysis

The proposed changes represent an evolution rather than a revolution in salary taxation.

Key aspects include:

• Retention of core components
• Improved organization and structure
• Updated references to align with new section numbers
• Maintained consistency in treatment of established components

6. Conclusion

The proposed Clause 16 of the Income Tax Bill, 2025, while maintaining the fundamental framework of salary taxation, introduces welcome structural improvements and clarity. The changes appear focused on better organization and modern relevance rather than substantial modifications to the tax treatment of salary components.

 

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Full Text:

Clause 16 Income from salary.

 

Dated: 27-2-2025