When calculating the net taxable income from the head ‘Income from Salary’ you can make use of various deductions and allowances to reduce the taxable income. These allowances and deductions are specified under different sections of the Income Tax Act, 1961. One such section, that allows tax-saving on the salary income, is Section 16 of the Income Tax Act. Here is a detailed analysis of the section and how it helps in tax saving.
What is Section 16 of the Income Tax Act?
Section 16 of the Income Tax Act provides three different types of tax deductions from your salary income. These deductions lower your income and help in bringing down your tax liability. The deductions under Section 16 include the following –
Let’s understand each of these deductions granted under Section 16 independently to understand how much tax can be saved.
Standard deduction under Section 16(ia) is a flat deduction that is allowed from the salary income. The concept of standard deduction was introduced in the Union Budget of 2018 wherein it replaced the tax-deductible transport allowance and medical allowance of INR 19,200 and INR 15,000 respectively. In the budget, a standard deduction of INR 40,000 was introduced which was to be deducted from the gross salary before calculating the tax on the same.
The limit of standard deduction under Section 16 was changed in the Interim Budget 2019. From the existing limit of INR 40,000, the deduction amount was raised to INR 50,000 to provide higher tax relief to salaried individuals. Currently, for the financial year 2021-22 and other years in future, the standard deduction from salary income stands at INR 50,000 till it is changed in the future budgets.
Standard deduction, Section 16 (ia) is also applicable for retired individuals who are earning pension income. Since the pension income is charged to tax under the head ‘Income from Salary’, a standard deduction of INR 50,000 is allowed every financial year on such pension income giving tax relief to pensioners.
The maximum limit of standard deductionunder Section 16 (ia) is INR 50,000. However, if the salary received by an employee is below INR 50,000, the standard deduction would be the salary received.
For example, say an employee earns a salary of INR 45,000 in a financial year. In this case, the standard deduction would be limited to INR 45,000 only. On the other hand, if the salary income is INR 4.5 lakhs, the standard deduction would be INR 50,000 and the taxable salary would become INR 4 lakhs.
The standard deduction, therefore, is calculated as the lower of the salary received or INR 50,000.
If an employer pays an entertainment allowance to its employees, the allowance forms a part of the gross salary and is added to the salary income. However, the deduction under Section 16 (ii) allows you to claim a tax deduction for entertainment allowance.
The amount of deduction that you can claim under Section 16(ii) depends on the nature of your employment. Have a look –
If you are a Government employee employed by the Central or the State Government, the deduction allowed under Income Tax u/s 16 (ii) for entertainment allowance would be the lowest of the following –
Moreover, to claim the deduction, your salary should not include any other allowance, perquisite, or benefit paid by the employer. Also, the deduction is calculated based on the amount of allowance received, not the amount that you spend on entertainment.
Say that you are a Government employee and your details are as follows –
INR 40,000/month or INR 4.8 lakhs annually
Entertainment allowance received
INR 2000/month or INR 24,000 annually
Entertainment allowance used
INR 1500/month or INR 1.8 lakhs annually
The available deduction would be the lowest of the following –
Eligible deduction under Section 16 (ii) = INR 5000
Note:Even though you used the allowance partially, the amount of allowance paid by the employer would be considered for calculation purposes.
If you are not employed by the State or Central Government, no deduction for entertainment allowance would be available to you. Section 16(ii) is not available for other employees and if your employer pays an entertainment allowance, the whole of the allowance received would be added to your taxable income and taxed at your income tax slab rate.
Your salary income attracts professional tax which forms a part of your tax liability. However, Section 16 (iii) of the Income Tax Act, 1961 provides a deduction for the professional tax payable. Here are some important aspects of claiming a deduction under Section 16 (iii) –
So, if you are a salaried individual, understand what deduction under Section 16 is. Make the maximum use of the deduction u/s 16 of the Income Tax Act, 1961 so that you can lower your taxable income and, consequently, your tax liability.
The amount of professional tax depends on the state in which you are employed. Different State Governments have different rates of professional tax. However, the maximum professional tax levied by the Government cannot exceed INR 2500.
No, you don’t need any documents to claim a standard deduction from your salary income. Section 16 deductions can be claimed when filing your taxes online on the e-filing website of the income tax department.
Yes, the employer usually considers the standard deduction when computing the TDS deduction from your salary. You can check the same in Form 16. If the employer did not consider the standard deduction, you can do so when filing your income tax returns to calculate your actual tax liability.
No, you cannot claim two standard deductions from two different employers. If you switch jobs, the aggregate salary earned in a financial year would be considered. Then, the standard deduction would be allowed on the aggregate amount of salary, once.
Yes, you can claim all other tax deductions and exemptions even after claim standard deduction on your salary income.