Section 16 Of The Income Tax Act

Introduction

Section 16 of Income Tax Act contains provisions related to deductions allowed from salary income under the head 'Income from Salaries’. It is an essential section for salaried individuals and pensioners as it helps reduce their net taxable income and tax liability. This detailed guide will help you understand Section 16 deductions, eligibility criteria, and how to leverage them to lower your tax outgo.

What Is Section 16 Of Income Tax Act?

Section 16 of Income Tax Act covers three main deductions that can be claimed from gross salary income to arrive at net taxable income:

1. Standard Deduction under Section 16 (i)/(a)
2. Entertainment Allowance under Section 16(ii)
3. Professional Tax under Section 16(iii)

These deductions prescribed under Section 16 provide tax relief to salaried taxpayers by lowering their net taxable salary. 

Deductions Under Section 16 of the Income Tax Act

1. Standard Deduction Under Section 16(i)/(a)

The standard deduction under Section 16(i)/(a) allows salaried individuals and pensioners to claim a flat deduction from their salary or pension income up to a limit specified by law. This provides uniform tax relief across income levels.

Key points to remember:

• The limit was enhanced from INR 40,000 to INR 50,000 in the 2019 budget
• A flat deduction of up to INR 50,000 is allowed on salary/pension
• A lower of INR 50,000 or actual salary/pension is deductible
• Available to all salaried (private/government) employees and pensioners
• Separate from deductions under Section 80C
• Not available under the new tax regime earlier (2020) but re-introduced from FY 2023-24

Let us understand the calculation of standard deduction with an example:

• Gross Salary = INR 8,00,000
• Standard Deduction under Section 16(i)/(a) = INR 50,000

(Lower of INR 50,000 or Gross Salary of INR 8 lakhs)

• Net Taxable Salary = INR 8,00,000 - INR 50,000 = INR 7,50,000

So, the fixed standard deduction helps reduce net taxable income for the individual in this case.

2. Entertainment Allowance Under Section 16(ii)

In addition to the standard deduction, the IT Act also allows entertainment allowance as a deduction under Section 16(ii), subject to specified conditions and limits.

• Applicable only to government employees
• The deduction allowed is the lowest value from the following:

1. 20% of the basic salary
2. INR 5,000
3. Actual entertainment allowance received

• Full entertainment allowance received by non-government employees is taxable

Let us take an example:

• Basic Salary = INR 50,000
• Actual expense = INR 8,000
• Entertainment Allowance Received = INR 4,000 (20% of the basic salary)
• Deduction under Section 16(ii) = INR 4,000 (Lower of specified limits)

3. Professional Tax Under Section 16(iii)

Professional tax, a direct tax, is deducted from your gross salary by your employer. The state government imposes it and may vary based on your place of residence. The maximum amount you can be charged is INR 2500. The tax is computed using different salary slab rates set by each state.

The professional tax paid can be claimed as a deduction under Section 16(iii):

• Deduction allowed for actual professional tax paid during the year
• If paid by the employer on behalf of an employee, it is first included in the salary as perquisite and then allowed as a deduction under this section

Conclusion

Section 16 of the Income Tax Act contains important provisions regarding deductions allowed from gross salary income to arrive at net taxable salary. Salaried individuals and pensioners should accurately claim these deductions under Section 16 while filing their ITR to lower their tax liability. Proper compliance and maximum utilisation of these deductions can help taxpayers save significant yearly taxes.

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Frequently Asked Questions on Section 16 Of Income Tax Act

1. Who can claim standard deduction under Section 16(i)/a)?

The standard deduction under Section 16(i)/(a) can be claimed by all salaried employees and pensioners from the private and government sectors.

2. How can salaried individuals reduce tax liability?

Salaried taxpayers should claim all eligible deductions under Section 16, 80C, 80D, 80E, etc., to lower their taxable income and tax liability.

3. When should ITR be filed to claim Section 16 deductions?

To claim Section 16 deductions, taxpayers should file their ITR within the due date, i.e. 31st July. Delayed filing will lead to the disallowance of these deductions.

4. Do I need to submit proof of expenses to claim the standard deduction under Section 16 (i)/(a)?

No, you do not need to submit any bills to claim a standard deduction. You will receive the deduction by default.

5. I switched employers during the previous fiscal year. Am I eligible for a standard deduction on the earnings I received from each employer separately?

The standard deduction, a fixed amount deducted from an employee's annual salary, remains applicable regardless of the number of jobs held. Only one standard deduction of Rs. 50,000 is permitted for the total income received from all employers collectively.

6. Can I also claim a transport and medical allowance along with a standard deduction?

No, you can only claim the standard deduction of INR 50,000, not the transport and medical allowance from FY 2018-19.

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