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.
Allowances Eligible for Standard Deduction on Salary
Before we discuss the allowances that are eligible, let us understand what are standard deductions. These are those parts of your income/ salary that are not subject to be taxed by the government. These deductions can reduce the tax that you pay. Irrespective of the category, every salaried person can claim these deductions. Interim Budget 2019, introduced more tax benefits for the salaried employees, one of the major ones was that Standard Deductions were raised to INR 50,000 from an earlier amount of INR 40,000. In the year 2020, the New Tax Regime was introduced, however it is the choice of the taxpayer to choose to file his/ her claims as per the New Tax Regime or the Old Tax Regime.
|Old Tax Regime (2021- 2022)||Particulars||New Tax Regime (2021- 2022)|
|INR 5 lakhs||Salary Income||INR 5 lakhs|
|INR 50,000||Standard Deduction||NA|
|INR 4,50,000||Taxable Salary||INR 5 lakhs|
The following deductions are permitted under Section 16:
- Standard Deductions:
- INR 50,000 from Assessment Year 2022-21
- Salary Amount
- Transport allowance
- Medical Allowance
- Entertainment Allowance
- Professional Tax
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
- Standard deduction
- Deduction for entertainment allowance paid by the employer
- Deduction for professional tax charged on the salary income
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)
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.
- Deduction for entertainment allowance under Income Tax Section 16(ii)
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
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
- INR 5000
- 20% of the basic salary
- Actual amount of entertainment allowance received
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 –
|Basic salary||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
- Flat amount – INR 5000
- 20% of the basic salary = 20% of 4.8 lakhs = INR 96,000
- Allowance received = INR 24,000
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 a Government employee
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.
- Deduction for professional tax paid on salary income under Section 16 (iii)
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)
- Deduction is available in the financial year in which you have paid a professional tax on your salary income
- If your employer pays the professional tax on your behalf, the tax so paid would be included under perquisites when calculating your gross salary. Thereafter, you would be allowed to claim a deduction for the professional tax paid by the employer under Section 16 (iii).
- There is no restriction on the deduction for professional tax. The amount of tax paid would be fully allowed as a deduction irrespective of the amount.
- If you are liable to pay any interest or penalty amount on the professional tax, such payments would not be allowed as a deduction.
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.
How to calculate standard deduction if you worked under multiple employers in the same financial year?
No matter whether you have worked under an individual or multiple employer(s), the standard tax deduction is a fixed sum applicable to your overall income in the complete financial year.
Suppose, for example, you have earned INR 70,000 while working for one employer from the month of April to August and then you’ve worked under another employer from the month of September to March and have earned a net salary of INR 90,000.
Then, the total salary for the complete financial year= INR 70,000+90,000 = INR 1,60,000
The fixed standard deduction= INR 50,000
Therefore, your net salary this fiscal= INR 1,60,000-50,000 = INR 1,10,000
Standard deduction under Section 16 vs income tax deductions under Chapter VI-A, including Section 80
|Standard Deduction||Tax Deduction Under Chapter VI-A|
|Standard deduction is fixed regardless of the actual expenditure.||It depends on the actual expenditure or investment.|
|A standard deduction can only be availed by individuals with a salaried income or pension. Business owners, self-employed taxpayers, or professionals, are not able to rip this benefit.||Chapter VI-A deduction is calculated on the gross income, which is the sum total of the earnings from all income streams.|
|The standard deduction can be applied before calculating the gross income on the salary.||Chapter VI-A deduction is applied after gross income is calculated..|
|It is constant at INR 50,000.||The limits vary from section to section.|
How can you claim standard deduction under section 16?
In most cases, it is the employer who will include this deduction while TDS, tax deducted at source (applicable to your yearly salary) is calculated. The amount that is issued by the employer will be reflected in Form 16. In case it is not, you can file the same while you file your Income Tax Return.
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.
No, if you opt for the new tax regime, no tax deductions would be allowed, including standard deduction.