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 the 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 u/s Section 16 in respect of their salary. The Interim Budget of 2019 raised the deduction under Section 16 from Rs. 40,000 to Rs. 50,000.

A taxpayer's pension from their former employer is also taxable under 'Salaries.' In this way, any taxpayer who receives a pension from their former employer is entitled to claim the deduction under Section 16 of the Income Tax Act, which is the lesser of the following: 

  • Pension amount

  • Maximum limit of Rs.50,000

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 u/ Sec 16(ia)

  • Deduction for entertainment allowance u/ Sec 16(ii)

  • Deduction for professional tax u/ Sec 16(iii)

Let us learn about these deductions u/ Section 16 in the following subsections.

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 Rs. 40,000 to Rs. 50,000 to provide higher tax relief to salaried individuals.

NOTE: The new tax regime introduced in the Union Budget 2020 has removed the benefit of standard deduction under Section 16(ia). However, the Union Budget 2023 re-introduced the standard deduction of Rs. 50,000 under Section 16 of the IT Act, 1961.

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

  • The actual salary amount, or

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

It is important to understand that the deduction u/ S 16 are separate from the tax benefits under Section 80C of the IT Act.

Illustration of Standard Deduction Calculation:

Particulars Old Tax Regime New Tax Regime (before 01 April 2023) New Tax Regime (From 01 April 2023)
Basic Salary + Dearness Allowance Rs. 9,00,000 Rs. 9,00,000 Rs. 9,00,000
Other Taxable Allowance Rs. 1,00,000 Rs. 1,00,000 Rs. 1,00,000
Gross Salary Rs. 10,00,000 Rs. 10,00,000 Rs. 10,00,000
Standard Deduction (on salary) Rs. 50,000 Rs. 0 Rs. 50,000
Total Income Rs. 9,50,000 Rs. 10,00,000 Rs. 9,50,000
Other Deductions (e.g. Section 80C/ 80E/10(10D)/ 80CCB(1)) Rs. 2,00,000 Rs. 0 Rs. 0
Income Chargeable to Tax Rs. 7,50,000 Rs. 10,00,000 Rs. 9,50,000
Income Tax Rs. 65,000 Rs. 75,000 Rs. 54,600

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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 was granted during the last year.

To determine the entertainment 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.

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

The tax on employment or professional tax levied by some states under Article 276(2) of the Constitution.

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 Section 16 Income Tax Act has no ceiling in monetary terms. Any state government is not eligible to levy 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 the head 'professional tax' of the salary.  

Conclusion:

As a salaried individual, you need to understand the meaning and importance of Section 16 of the Income Tax Act, 1961.  This section deals with the provisions related to the deduction of salaries and its components for tax purposes. Section 16 outlines the rules for calculating taxable income from salaries. You can 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, 1961, deals with deductions available to individuals who earn income from salaries. It provides three types of deductions that can be claimed to reduce the taxable salary income. These deductions are:
    • Standard deduction (Section 16(ia))

    • Entertainment allowance (Section 16(ii))

    • Professional tax (Section 16(iii))

  • What is the standard deduction under Section 16(ia)?

    The standard deduction under section 16(ia) of the Income Tax Act, 1961, is a flat deduction of Rs. 50,000 or the amount of salary, whichever is less. It was introduced by the Government of India in the Union Budget of 2018 and replaced the earlier medical allowance and transport allowance deductions.
  • How is standard deduction u/S 16(ia) calculated?

    The standard deduction under Section 16(ia) of the Income Tax Act, 1961, is calculated as per the less of the following:
    • Standard Deduction of Rs. 50,000 or

    • The total amount of salary

  • Is a deduction under Section 16 the same as a rebate?

    No, a deduction under Section 16 and a rebate are not the same. Both are tax-saving instruments under the Income Tax Act, but they work in different ways:
    • Deduction: A deduction is a reduction from your gross income. For example, the standard deduction under Section 16 is a deduction of ₹ 50,000 from your salary income.

    • Rebate: A rebate is a refund of tax that you have already paid. For example, the tax rebate for senior citizens is a rebate of ₹ 7,500 for citizens who are 60 years of age or older.

  • Can I claim additional medical allowance or transport allowance along with standard deduction u/S 16(ia)?

    No, you cannot claim additional medical allowance or transport allowance along with the standard deduction under Section 16(ia). The standard deduction replaced the medical allowance and transport allowance deductions in 2018, and you can only claim one of these deductions.

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