Tag: Standard Deduction

Management Notes

Deduction’s u/s 22 – a) Standard Deduction b) Interest on Borrowed

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Under the Income tax Act, 2025, Section 22 provides deductions while computing income chargeable under the head “Income from House Property.” The section mainly allows two important deductions: 30% of the annual value as standard deduction and interest payable on borrowed capital used for acquiring, constructing, repairing, renewing or reconstructing the property. These deductions are allowed after determining the annual value under Section 21.

a) Standard Deduction [Section 22(1)(a)]

A standard deduction of 30% of the annual value is allowed while computing income from house property. The deduction is allowed irrespective of the actual amount spent by the owner on repairs, maintenance, insurance, electricity, security or other expenses relating to the property. Therefore, the taxpayer does not have to prove the actual expenditure incurred on maintenance.

Formula:

Standard Deduction = 30% × Annual Value

For example, if the annual value of a house property is ₹5,00,000:

Standard Deduction = ₹5,00,000 × 30% = ₹1,50,000

Thus, ₹1,50,000 will be allowed as deduction while computing income from house property.

b) Interest on Borrowed Capital [Section 22(1)(b)]

Where a house property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the interest payable on such borrowed capital is allowed as a deduction, subject to the specific limits and conditions applicable to the property. For a let out property, the interest deduction is generally allowed without a monetary ceiling under Section 22(1)(b).

For certain self occupied properties, the aggregate deduction for interest is restricted to ₹2,00,000, where the prescribed conditions are satisfied, including completion of acquisition or construction within the specified period and furnishing the required certificate. In other cases, the applicable limit is ₹30,000.

Interest relating to the period before acquisition or construction of the property is allowed in five equal instalments, beginning from the tax year in which the property is acquired or construction is completed.

Computation

Annual Value
Less: 30% Standard Deduction
Less: Interest on Borrowed Capital
= Income from House Property

Management Notes

Computation of Taxable Salary

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Taxable Salary means the amount of salary income that remains chargeable to tax after including taxable salary components and deducting the deductions specifically allowed under the Income tax Act, 2025. Salary is taxable under the head “Salaries” when an employer employee relationship exists. The computation begins with basic salary and other taxable components such as dearness allowance, bonus, commission, taxable allowances, perquisites and profits in lieu of salary. Eligible exemptions and deductions are then considered according to the applicable provisions and tax regime.

Format for Computation of Taxable Salary:

Particulars Amount
Basic Salary xxx
Add: Dearness Allowance xxx
Add: Bonus / Commission xxx
Add: Taxable Allowances xxx
Add: Taxable Perquisites xxx
Add: Profits in lieu of Salary xxx
Add: Other Taxable Salary Components xxx
Gross Salary xxx
Less: Exemptions, where applicable xxx
Salary after Exemptions xxx
Less: Standard Deduction and other deductions allowed under the applicable provisions xxx
Income Chargeable under the Head Salaries xxx

Step 1: Determine Basic Salary

Basic salary is the principal component of salary and is fully included in taxable salary, subject to the applicable provisions. It may be paid monthly or annually.

Step 2: Add Taxable Allowances

Allowances such as dearness allowance, taxable house rent allowance, transport related allowances and other allowances are included according to their respective tax treatment. Certain allowances may be wholly or partly exempt if the prescribed conditions are satisfied.

Step 3: Add Taxable Perquisites

The value of taxable benefits provided by the employer is added to salary. Examples include rent free accommodation, concessional accommodation, motor car facilities and certain loans or other benefits. The value is determined according to prescribed rules.

Step 4: Add Other Salary Components

Bonus, commission, pension, gratuity, profits in lieu of salary and other taxable employment related receipts are included where applicable.

Step 5: Allow Eligible Deductions

After determining salary income, deductions specifically permitted under the applicable provisions are reduced. The standard deduction is an important deduction available subject to the applicable tax regime and prescribed limits.

Example:

Suppose an employee receives:

Basic Salary = ₹6,00,000

Bonus = ₹50,000

Taxable Allowances = ₹1,00,000

Taxable Perquisites = ₹50,000

Gross Salary = ₹8,00,000

If the applicable standard deduction is ₹50,000:

Taxable Salary = ₹8,00,000 − ₹50,000 = ₹7,50,000

Therefore, ₹7,50,000 will be the income chargeable under the head Salaries before considering any other applicable provisions.

Management Notes

Deduction from Salary [Sec. 19]

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Under the Income tax Act, 2025, Section 19 provides for certain deductions while computing income chargeable under the head “Salaries.” These deductions are allowed from the gross salary in accordance with the conditions prescribed by the Act. After considering taxable salary components such as basic salary, allowances, perquisites, bonus and other employment related receipts, the eligible deductions are reduced to determine the income chargeable under the head Salaries. The important deductions available under Section 19 include the standard deduction, deduction for entertainment allowance in specified cases, and deduction for employment tax or professional tax, subject to the prescribed conditions.

1. Standard Deduction

The standard deduction is a fixed deduction available to an employee from salary income, subject to the applicable amount and conditions. It is allowed without requiring the employee to prove actual expenditure incurred for earning salary. This deduction provides a simple method of reducing taxable salary income and is available subject to the provisions applicable to the relevant tax regime.

2. Entertainment Allowance

A deduction may be available in respect of entertainment allowance for specified employees, particularly government employees, subject to the conditions and limits prescribed under the Act. The deduction is not generally available merely because an employee receives entertainment allowance. The amount of deduction is determined according to the prescribed rules and qualifying conditions.

3. Employment Tax

A deduction may also be allowed for tax on employment, commonly referred to as professional tax, where such tax is actually paid by the employee and the deduction is permitted under the applicable provisions. The deduction is considered while computing taxable salary income.

Computation

The basic computation can be represented as:

Gross Salary

Less: Eligible deductions under Section 19

= Income chargeable under the head Salaries

For example, if an employee has gross salary of ₹8,00,000 and is entitled to a standard deduction of ₹50,000, the salary income after the standard deduction would be ₹7,50,000, before considering any other applicable deduction or adjustment.

Thus, Section 19 reduces taxable salary income by allowing specified deductions, thereby helping in determining the final income chargeable under the head Salaries. The exact deduction available depends upon the taxpayer’s circumstances and the tax regime applicable to the taxpayer.

Management Notes

Rate Of Tax Under Default Tax Regime (New Regime) U/S 202

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Under the Income tax Act, 2025, Section 202 provides the Default Tax Regime, commonly known as the New Tax Regime, for specified taxpayers. It applies to an individual, Hindu Undivided Family, Association of Persons other than a co operative society, Body of Individuals and specified Artificial Juridical Persons, unless the taxpayer exercises the prescribed option to choose the regular tax regime. The new regime provides lower and wider tax slabs compared with the old regime. The rates under Section 202 apply from Tax Year 2026 27. The taxpayer generally gets fewer deductions and exemptions under this regime, subject to the deductions specifically permitted by law.

Tax Rates under Section 202

Sl. No. Total Income for Tax Year 2026 27 Rate of Tax
1 Up to ₹4,00,000 Nil
2 ₹4,00,001 to ₹8,00,000 5%
3 ₹8,00,001 to ₹12,00,000 10%
4 ₹12,00,001 to ₹16,00,000 15%
5 ₹16,00,001 to ₹20,00,000 20%
6 ₹20,00,001 to ₹24,00,000 25%
7 Above ₹24,00,000 30%

These rates are the default rates under Section 202. A taxpayer can exercise the prescribed option to move out of the default regime and choose the regular tax regime.

Example: If an individual has total income of ₹18,00,000, tax is calculated progressively using the applicable slabs of 0%, 5%, 10%, 15% and 20%. Surcharge, where applicable, and Health and Education Cess at 4% are added separately.

Management Notes

Deductions from Salary under Section 16

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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.

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