Deductions from Salary under Section 16
by Section 16 of the Income Tax Act provides certain deductions from income chargeable under the head Income from Salary. These deductions are allowed while calculating the taxable salary income of an individual. The important deductions under this section include Standard Deduction, Entertainment Allowance and Professional Tax. The eligibility and amount of deduction depend upon the nature of the income and the status of the taxpayer. These deductions help reduce the taxable salary before determining the individual’s Gross Total Income. A taxpayer can claim only those deductions that are specifically permitted under the applicable provisions of Section 16.
1. Standard Deduction – Section 16(ia)
Standard Deduction is a fixed deduction available from salary income under Section 16(ia). It is available to an individual who earns salary income, including a pensioner receiving pension taxable under the head Salary. The deduction is available without the need to provide actual expenditure details. Under the old tax regime, the standard deduction is generally ₹50,000 or the amount of salary, whichever is lower. Under the new tax regime, the standard deduction is generally ₹75,000 or the amount of salary, whichever is lower. It reduces the taxable salary income.
2. Entertainment Allowance – Section 16(ii)
Entertainment Allowance is covered under Section 16(ii). The deduction is available only to a Government employee, subject to prescribed conditions. The deduction is the least of the specified amount, namely ₹5,000, 20% of salary, or the actual entertainment allowance received. For this purpose, salary generally refers to basic salary, excluding allowances and perquisites. Employees of private organisations are not eligible for this deduction. The allowance received is first included in salary income and the eligible deduction is then allowed while computing taxable salary. Thus, the provision provides limited relief to eligible government employees.
3. Professional Tax – Section 16(iii)
Professional Tax or tax on employment paid by an employee to a State Government or local authority is deductible under Section 16(iii). The deduction is allowed for the amount of professional tax actually paid during the relevant year. If the employer pays the professional tax on behalf of the employee, it is first included in the employee’s salary and then allowed as a deduction under this section. The deduction is subject to the amount actually paid. Professional tax is therefore reduced from salary income while calculating the Income from Salary under the applicable tax provisions.