When computing payable taxes from gross income, taxpayers can utilise various allowances and deductions to reduce their tax outgo. These allowances and deductions are mentioned under various sections of the Income Tax Act. One such section is Section 16 of the Income Tax Act. With this section, you can claim deductions and reduce the tax payable on your salary.
Read on to know about this section.
The following deductions are applicable under this section:
The following sections will show the various deductions under this section independently so that you can compute your tax savings.
Also read: Section 24 of the Income Tax act
Standard deduction comes under Section 16 (i a) and is a flat tax deduction allowed on salary income. The primary intent of this deduction was to replace allowances on transport and medical reimbursement of up to Rs. 19,200 and Rs. 15,000, respectively.
In 2018’s budget, India’s finance minister allowed a standard tax deduction of Rs. 40,000 on gross salary. However, this was amended in the Interim Budget 2019. So, taxpayers can now claim the lower of the following amount for a tax deduction on their total salary:
Furthermore, you can claim this tax deduction regardless of your existing spending.
Let us understand how this section works with an example:
Suppose Rahul earns a total salary of Rs. 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 Rs. 5.5 lakh in a financial year. Here, he will be eligible to claim a standard deduction of Rs. 50,000. As a result, his taxable income will become Rs. 5 lakh.
The Government of India introduced standard deduction on tax, intending to provide tax relief to salaried people. As mentioned earlier, the limit, which was previously set at Rs. 40,000 was raised to Rs. 50,000 in 2019.
But does this amendment benefit salaried taxpayers more?
Previously, Section 16 of the Income Tax Act allowed reimbursements for medical expenses and conveyance. However, the deductions had a limit of:
Therefore, the total amount that one could claim from their gross salary through such allowances was Rs. 34,200 (Rs. 15,000 + Rs. 19,200).
With this amendment, you get an extra tax benefit of Rs. 15,800 (i.e., Rs. 50,000 – Rs. 34,200).
Mentioned below is an example that will help you understand the process in detail.
Suppose your yearly salary is:
|Basic pay||Rs. 6,00,000|
|Dearness Allowance||Rs. 2,00,000|
|EPF contributions||Rs. 25,000|
|PPF deposits||Rs. 50,000|
|Transport allowance||Rs. 19,200|
|Medical allowance||Rs. 15,000|
|Total Income||Rs. 8,00,000 (Rs. 6,00,000 + Rs. 2,00,000)|
|Gross Income||Rs. 7,25,000 – (Rs. 25,000 + Rs. 50,000)|
Now, taking the previous standard deduction limit in mind, here is how your tax outgo will look:
Taxable income = Gross salary – transport and medical allowance (Rs. 7,25,000 – Rs. 34,200) = Rs. 6,90,800.
Tax outgo as per old tax regime:
Tax on income of up to Rs. 2,50,000 = Nothing.
Tax on income of between Rs. 2,50,000 and Rs. 5,00,000 at 5% rate = Rs. 12,500.
Tax on the remaining income at 20% rate = Rs. 38,160 (20% of Rs. 6,90,800 – Rs. 5,00,000).
Now, after the amendment in the standard deduction limit, your tax outgo will be:
Taxable income = Rs. 7,25,000 – Rs. 50,000 = Rs. 6,75,000.
Tax liability on income up to Rs. 2,50,000 = Nil.
Tax on income between Rs. Rs. 2,50,000 and Rs. 5,00,000 = Rs. 12,500.
Tax on the remaining income at 20% rate = Rs. 35,000 (20% of Rs. 6,75,000 – Rs. 5,00,000).
It is evident that under the new standard deduction limit, you can save substantial taxes. However, note that you will be able to obtain this deduction if you opt for the old tax regime.
If your employer pays you an entertainment allowance, then it is first added to your salary income, and after that, a deduction is provided considering a few criteria. The amount of deduction you can claim entirely depends on your employment nature.
If you are employed with the Central or State Government, deduction on entertainment allowances under Section 16 of the Income Tax Act will be allowed to the lowest amount of:
Moreover, your salary must not include any other allowance or benefit to claim this deduction. Note that the authority calculates this deduction based on how much allowance you receive, rather than considering how much you spend on entertainment.
|Basic salary||Rs. 50,000 a month (Rs. 6,00,000 a year)|
|Amount of entertainment allowance you get||Rs. 1,500 a month (Rs.18,000 a year)|
|Amount of entertainment allowance you use||Rs. 1,000 a month (Rs. 12,000 a year)|
As per this example, here is your available deduction according to this section’s provisions:
Clearly, the lowest amount here is Rs. 5,000. So, you will be eligible for a tax deduction of Rs. 5,000.
Note: Even though you did not use the entire entertainment allowance, the amount that your employer paid will be considered for the final calculation of deductions.
You can claim this deduction on tax on employment as per Section 16(iii) of the Income Tax Act. Here, the amount you pay as a tax on employment is allowed for a tax deduction. However, before proceeding, keep these pointers in mind:
Also read: Section 54F of the Income Tax Act
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.
Ans: 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.
Ans: 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.
Ans: 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.
Ans: 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.
Ans: 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.
Before you go…