The Indian government is preparing to replace the outdated Income Tax Act of 1961 with the modernized Income Tax Bill, 2025. This new legislation introduces notable changes in the way salary income is taxed, with a special focus on simplifying the process for salaried employees. A key objective of the bill is to make tax rules more accessible and easier to understand, especially for individuals without a background in tax law. This article provides an overview of how salary income is defined under the new bill and outlines the various components included for taxation.
Overview of Salary Income in the Income Tax Bill, 2025
The Income Tax Bill, 2025 introduces a more straightforward approach to defining and taxing salary income. Before exploring the specifics of salary taxation, it’s important to understand two key foundational changes in the bill:
1. New Classification of Income
Under the updated tax regime, all income is categorized into five heads, with salary being one of them. The other four include:
Income from House Property
Profits and Gains from Business or Profession
Capital Gains
Income from Other Sources
This structure remains broadly consistent with the previous system but is presented more clearly for ease of understanding.
2. Introduction of the “Tax Year”
The bill also replaces the terms “assessment year” and “previous year” with a single, unified concept: the “tax year.” This tax year will follow the same 12-month period—April to March—but simplifies how income reporting and tax computation are handled
What the Income Tax Bill, 2025 Says About Salary Income
The Income Tax Bill, 2025 outlines specific types of income that fall under the category of “Salaries” for taxation purposes. According to the proposed provisions, the following components will be taxable:
1. Salary Due from Current or Former Employer
Any salary that becomes due during the tax year—whether from a current or former employer—is taxable, even if it has not yet been paid.
2. Salary Paid in Advance
If an employer pays or allows salary to an employee before it becomes due, that amount is still considered taxable in the year it is received.
3. Arrears of Salary
Any unpaid salary from previous years that is received in the current tax year will be taxed in the year of receipt, regardless of when it was originally due
Types of Income Treated as Salary Under the Income Tax Bill, 2025
The Income Tax Bill, 2025 clearly outlines the types of income that will be classified and taxed under the head “Salaries.” These include both monetary payments and certain non-monetary benefits received by an employee. Below is the list of income sources considered as salary:
1. Wages
Regular payments made by an employer to an employee for services rendered are considered salary income.
2. Annuity or Pension
Any annuity or periodic pension received by a retired employee is taxable under the salary head.
3. Gratuity
Gratuity received during service or upon retirement is treated as part of salary income for taxation, subject to exemptions as applicable.
4. Fees or Commission
Additional earnings such as fees or commissions paid by the employer are included in taxable salary income.
5. Perquisites
Non-cash benefits like employer-provided housing, cars, stock options, or other perks are considered perquisites and are taxed as salary income.
6. Profits in Lieu of or in Addition to Salary/Wages
Any amount received instead of or in addition to regular salary or wages—such as compensation for early termination—is taxable as salary.
7. Advance Salary
Salary received in advance is taxable in the year it is received, not when it becomes due.
8. Leave Encashment
Encashment of unused leave by an employee is treated as salary income and taxed accordingly.
9. Employer Contribution Beyond Limit to Provident Fund
Any contribution by the employer to the employee’s provident fund exceeding the tax-exempt limit is taxed as part of salary.
10. Employer Contribution to Pension Scheme
Contributions made by the Central Government or any other employer to an employee’s pension scheme account are considered taxable salary income.
11. Contribution to the Agniveer Corpus Fund
Any contribution made by the Central Government to the Agniveer Corpus Fund on behalf of an Agniveer (under the Agnipath Scheme) is also treated as salary income
Advance Salary: How It’s Taxed
A common question among salaried individuals is how advance salary is treated under the tax rules. The Income Tax Bill, 2025 makes it clear:
If you receive salary in advance during a particular tax year, it will be taxed in the year it is received, not when it becomes due.
This ensures that the same income is not taxed again in the following year, effectively preventing double taxation and offering clarity for employees managing advance payments.
Partners in a Partnership Firm: Is It Salary Income?
If you’re a partner in a partnership firm, the income you earn—whether as salary, commission, or remuneration—is not taxed under the ‘Salaries’ head.
Instead, it is classified as business income and taxed under the appropriate head in the tax structure.
So, unlike regular employees, partners are taxed differently and are not subject to salary income provisions under the new bill
Will the Tax Rates Change?
Here’s the reassuring news: the Income Tax Bill, 2025 does not alter the existing tax rates or slabs for salaried individuals. Your income will continue to be taxed under the current slab structure. The primary focus of the new bill is to simplify the treatment of salary income, not to increase your tax burden.
New Tax Regime – Income Tax Slabs (FY 2025–26)
Under the new tax regime, tax slabs are broader and rates are lower, offering a simplified structure for many taxpayers:
| Income Range (₹) | Tax Rate |
|---|---|
| 0 – 4 Lakh | 0% |
| 4 – 8 Lakh | 5% |
| 8 – 12 Lakh | 10% |
| 12 – 16 Lakh | 15% |
| 16 – 20 Lakh | 20% |
| 20 – 24 Lakh | 25% |
| Above 24 Lakh | 30% |
Note: Salaried individuals under this regime benefit from a standard deduction of ₹75,000, effectively raising the zero-tax threshold to ₹12.75 lakh when combined with slab benefits.
Old Tax Regime – Income Tax Slabs (FY 2025–26)
The old regime continues with its familiar structure and allows for multiple deductions and exemptions:
| Income Range (₹) | Tax Rate |
|---|---|
| 0 – 2.5 Lakh | 0% |
| 2.5 – 5 Lakh | 5% |
| 5 – 10 Lakh | 20% |
| Above 10 Lakh | 30% |
Note: Taxpayers under the old regime can still claim deductions such as Section 80C (investments), 80D (health insurance), HRA, and others. This regime suits those with significant eligible deductions, while the new regime favors those seeking lower tax rates with fewer exemptions.
Why Is This Simplification Important?
The Income Tax Bill, 2025 aims to make taxation more accessible, especially for salaried individuals. Here’s why the simplification matters:
Consolidated Rules: Salary income components are now grouped together in one section, eliminating the need to search across different parts of the law.
Simplified Language: Technical terms like perquisites and profits in lieu of salary are now explained more clearly, reducing legal jargon.
Easier Tax Filing: With fewer confusing provisions, filing your return is simpler and less intimidating—potentially making self-filing easier for many
How Will This Affect You?
For salaried taxpayers, the changes bring meaningful benefits:
Greater Clarity: Clearer definitions help you better understand what forms part of your taxable salary.
Fewer Filing Errors: Simplified provisions reduce the risk of mistakes when filing, and that means fewer chances of receiving a tax notice.
No Change in Tax Rates: With tax slabs unchanged, you won’t face unexpected increases in your tax liability.
The Bottom Line
The Income Tax Bill, 2025 is a welcome reform for salaried individuals. By simplifying how salary income is defined and taxed, the bill helps reduce confusion and enhances transparency.
While the tax rates remain the same, the streamlined approach means a smoother, more straightforward filing process. Understanding your salary structure and tax obligations will now be easier—letting you focus more on your career and less on decoding complex tax rules.
As implementation is expected in 2026, this reform marks a positive step toward a more user-friendly tax system for working professionals
About the Author
Priya
Priya is an experienced legal writer known for her ability to simplify complex legal concepts into practical, easy-to-understand insights. Her work equips entrepreneurs with the legal knowledge they need to confidently start, run, and grow their businesses within the framework of the law
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