Deductions on Salary Under Section 16 of the Income Tax Act, 1961
Section 16 of Income Tax Act, 1961
Section 16 of the Income Tax Act, 1961 mentions allowances and deductions on your taxable salary. According to Section 16, salaried taxpayers and pensioners*, irrespective of the tax slab they fall under, can claim deductions on their taxable income. The section covers three components – standard deduction, entertainment allowance, and deduction on professional tax under Section 16 of the Income Tax Act. The sole aim of Section 16 is to provide tax relief to salaried individuals. Let’s understand the deductions in detail.
*Pension received by taxpayers from their previous employer is taxable. Since the amount is taxed, it’s also eligible for deduction under Section 16 of the Income Tax Act.
Interesting Fact:
In the Interim Budget 2019, the Finance Ministry increased the standard deduction amount from ₹40,000 to ₹50,000.
Standard Salary Deduction Under Section 16 (ia)
Standard deduction is a flat tax deduction of up to ₹50,000 on salary income under Section 16 (ia). The primary intent of this deduction was to replace allowances on transport and medical reimbursement of up to ₹19,200 and ₹15,000, respectively.
The amount of deduction available under Section 16 is ₹50,000 or total salary, whichever is lower. Let’s understand how this section works with an example.
Suppose Rahul earns a total salary of ₹50,000 in a financial year. In this situation, he will get a standard deduction on his entire salary. On the other hand, Vikas earns ₹5.5 lakh in a financial year. Here, he will be eligible to claim a standard deduction of ₹50,000. As a result, his taxable income will become ₹5 lakh.
Calculation of Standard Deduction
| Particulars | FY 2018-19 (₹) | FY 2019-20 (₹) |
| Basic Salary + Dearness Allowance | 7,00,000 | 7,00,000 |
| Other Taxable Allowance | 1,00,000 | 1,00,000 |
| Gross Salary | 8,00,000 | 8,00,000 |
| Standard Deduction | 40,000 | 50,000 |
| Total Income | 7,60,000 | 7,50,000 |
| Other Deductions | 2,00,000 | 2,00,000 |
| Income Chargeable to Tax | 5,60,000 | 5,50,000 |
| Income Tax | 24,500 | 22,500 |
| Tax Saved | – | 2,000 |
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Entertainment Allowance Under Section 16 (ii)
The entertainment allowance is included in your salary income. The deduction is provided based on the criteria that the allowance should be rolled out by the employer. Now let’s understand entertainment allowance for a Government employee and a non-Government employee.
Employees working for central government or state government can claim either of the deductions, whichever is lower:
- 20% of basic salary
- ₹5,000
- Amount that’s granted as entertainment allowance in the financial year
However, certain criteria are to be met to realise the allowance:
- The salary considered should be the gross amount without any benefit
- You can’t consider the amount spent from the entertainment allowance
However, non-government employees are not eligible for entertainment allowance under section 16 (ii).
Professional Tax Under Section 16 (iii)
According to Section 16 (iii) of the income tax act, the professional tax paid by employees is eligible for deduction from their income. This deduction is available to all salaried individuals and is limited to the actual amount of professional tax paid or ₹2,500, whichever is less. Note that professional tax rates and rules vary from state to state. In order to claim a deduction for professional tax under Section 16 (iii), the individual must have actually paid the tax during the financial year. Another point to note, the tax paid by the employer on behalf of the employee is also eligible for deduction.
Final Word
If you are a salaried individual, a proper understanding of Section 16 of the Income Tax Act is crucial. Go through the above sections to lower your taxable income and, thus, your tax liability.
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FAQs
No, if you are a non-government employee, you are not eligible to claim a deduction for entertainment allowances. This deduction is only applicable for government employees under certain criteria. Even employees of statutory corporations and local authorities are not eligible to claim this deduction.
As per the previous provisions, taxpayers had to provide medical bills and travel expenses proof to claim a standard deduction. However, since the amendment to this section, you need not submit any bills to claim the standard deduction.
While filing ITR, you can either choose the ‘Prepare and Submit Online’ option or the ‘Download Utility’ option. In the first option, you will see that all details are already filled-in. You just need to double-check the details and then file ITR. In the latter option, you need to enter the relevant details and then file ITR.
The amount of professional tax entirely depends on the Indian state in which you work. Different state governments apply different professional tax rates on salary income. However, note that the government cannot levy a professional tax of more than Rs. 2,500 annually.
No, as per the provisions under Section 16 of the Income Tax Act, you cannot claim a standard deduction on salary taken from two employers at the same time. So, if you change your employer, the IT department will consider the aggregate salary you earned during this particular FY.
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