Section 16 of the Income Tax Act

For calculating net taxable income from the 'Income from Salary' head, one can make use of different deductions and allowances, which can help reduce the overall taxable income. Various sections of the Income Tax Act, of 1961 specify these allowances and deductions. Section 16 of the Income Tax Act allows some deductions on salary income.

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Let us look at the deduction under section 16 in detail.

What is Section 16 of the Income Tax Act?

Deductions are those part of the salary that is not subject to taxation, thus reducing the tax that one pays. Irrespective of the tax category, every salaried person is eligible to claim these deductions in respect of salary are covered u/s 16. The Interim Budget of 2019 raised the deduction under section 16 from INR 40,000 to INR 50,000.

A taxpayer's pension from their former employer is also taxable under 'Salaries.'

In the same way, any taxpayer who receives a pension from their former employer is entitled to claim the deduction, which is the pension amount or Rs.50,000, whichever is lesser, as per Section 16 of the Income Tax Act.

Deductions under Section 16

Section 16 of the Income Tax Act provides three different types of tax deductions on salary income. These deductions help lower the tax liability. The deductions under Section 16 include the following:

  • Standard deduction

  • Deduction for entertainment allowance paid by the employer

  • Deduction for professional tax charged on the salary income

Standard Deduction under Section 16 (ia)

The standard deduction under Section 16 (ia) is a flat deduction allowed from the salary income. As mentioned above, the limit of standard deduction u/s 16 (ia) was changed in the Interim Budget 2019 from INR 40,000 to INR 50,000 to provide higher tax relief to salaried individuals.

Every financial year, a salaried individual can claim the lower amount from the below two as the standard deduction:

  • The actual salary amount or

  • The standard deduction, which is Rs. 50,000, whichever is low

For example, if an employee's salary is Rs. 40,000 in a financial year, the standard deduction will be limited to Rs. 40,000, whereas if the salary is Rs. 3.5 lakhs, the deduction will be limited to Rs. 50,000. 

Entertainment Allowance under Section 16 (ii)

The entertainment allowance is initially included under the head 'Salaries' in the salary income, and after that, a deduction is provided on the basis that is counted in the following paragraph:

In the case of a government employee (i.e., an employee of the State or Central Government), the minimum of the below-mentioned are deducted:

  • 20% of the basic salary

  • Rs. 5,000

  • Entertainment allowance amount that is granted during the last year.

To determine the entertainment amount allowance that is deducted from the salary, the below points must be considered:

  • The 'salary' of an individual for this purpose excludes the benefits, allowance, and other perquisites.

  • The actual amount that is expended towards the entertainment (out of the allowance of entertainment received) is not considered.

  • The deduction is calculated based on the allowance amount received and not on the amount spent. 

In the case of a non-government employee (Including the employees of Local Authority and Statutory Corporations):

The entertainment allowance is not deductible in this case. Deduction u/s 16 (ii) is not available for any other employees except government employees. If the employer pays an entertainment allowance, the complete allowance received is added to the individual's taxable income and taxed at the respective income tax slab rate.

Tax on Employment or Professional Tax under Section 16 (iii)

The tax on employment or professional tax levied by some States in article 276 of the Constitution is granted as deducted.

In this situation, the following points must be kept in mind:

  • The deduction is available only in the year when professional tax is paid.

  • The Income Tax Act in article 276 of the Constitution has no ceiling in monetary terms. Any State Government is not eligible to impose more than Rs. 2,500 annually as professional tax. As per the Income Tax Act, whatever professional tax an individual has paid during the last year is deductible.

  • If an employer pays the professional tax on behalf of an employee, then it is included in the employee's salary under 'perquisite,' and after that, the equal amount is allowed as the deduction under 'professional tax' deducted from the salary.  

Example:

To understand this, let us take an example: Mr. X is posted in the city of Hyderabad and needs Rs. 2,000 yearly as a professional tax. He paid Rs. 4,000 on 31st May 2019 as professional tax (which is Rs. 2,000 for 2018–19 and Rs. 2,000 for 2019–20). In this situation, Rs. 4, 000 is deductible for the last year, 2019–20, here, it is not correct to say that only Rs. 2,500 is deductible).

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Conclusion:

So, as a salaried individual, you need to understand the meaning and importance of section 16 of the Income Tax Act, and the deduction in respect of salary are covered u/s 16. Make the maximum use of the deduction u/s 16 to lower your taxable income, reducing your tax liability.

FAQ's

  • What is section 16 of the Income Tax Act?

    Section 16 of the Income Tax Act allows for a deduction from the income chargeable to tax for salaried individuals. It offers standard deduction u/s 16(ia), entertainment allowance, and professional tax. With this deduction under section 16, a salaried employee can lower their taxable salary income chargeable to tax.
  • What is the standard deduction under section 16 (ia)?

    The standard deduction under Section 16(ia) is a flat deduction allowed from the salary income. As mentioned above, the limit of standard deduction u/s 16(ia) was changed in the Interim Budget 2019 from INR 40,000 to INR 50,000 to provide higher tax relief to salaried individuals.
  • How is standard deduction u/s 16(ia) calculated?

    Every financial year, a salaried individual can claim the lower amount from the below two as the standard deduction u/s 16 (ia):
    • The actual salary amount or
    • The standard deduction, which is Rs. 50,000, whichever is low.
  • Is a deduction under section 16 the same as a rebate?

    No, rebates and standard deductions are different. A rebate under section 87A is like a partial refund from tax payable, while a deduction under section 16 is to be claimed from the income of a salaried individual.
  • Can I claim additional medical allowance or transport allowance along with standard deduction u/s 16 (ia)?

    No, standard deduction under Section 16(ia) is a flat deduction allowed from the salary income. No additional allowance is allowed. The limit of the standard deduction is Rs. 50,000.
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