Section 16 of the Income Tax Act

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Income under Section 16

The CBDT or Central Board of Direct Taxes has announced the Finance Act, 2018 wherein it has amended the Income Tax Act's Section 18.

What is Section 16?

Under this new provision of the Income Tax Act, a taxpayer who has income that is chargeable under the head ‘Salaries’ should allow deduction of Rs.40, 000 or the salary amount, whichever is less, for the computation of the taxable income.

The representations are received that are requiring the clarification such as whether a taxpayer, who gets a pension from his /her former employer, should as well be eligible for claiming the deductions.

The pension that a taxpayer gets from his/her former employer is also taxable under ‘Salaries’.

In the same way, any taxpayer who receives a pension from his/her former employer is entitled to claim the deduction which is the pension amount or Rs.40, 000, whichever is lesser as per Section 16 of the Income Tax Act.

Deductions under Section 16

The income that is chargeable under ‘Salaries’ head is computed after the following deductions under Section 16:

  • Deduction of entertainment allowance
  • Standard deductions
  • Professional tax

Standard Deduction [Section 16(i)/ (ia)]

  • The salary amount or
  • The standard deduction which is Rs.40, 000, whichever is low

Entertainment Allowance [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 case of a government employee (i.e. an employee of State or Central Government), the minimum of the below mentioned is deducted:
    • 20% of the basic salary
    • 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.
  • In case of a non-government employee (Including the employees of Local Authority and Statutory Corporation):
    • The allowance for the entertainment is not deductible in this case.

Tax on Employment or Professional Tax [Section 16 (iii)]

The tax on employment or professional tax, levied by some State 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 wherein professional tax is being paid.
  • There is no ceiling in monetary terms in the Income Tax Act in article 276 of the Constitution. 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 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, image Mr. X is posted in the city of Hyderabad and he 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 the year 2018 – 19 and Rs.2, 000 for the year 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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