Section 16 of Income-tax Act,1961-Deductions from Salaries

Under the Income Tax Act, 1961, certain deductions are allowed when computing a person's total income. Section 16 of the Income Tax Act deals with deductions that are allowed to be deducted from a person's gross salary. Read along to know more about the deductions allowed under section 16 of the Income-tax Act,1961.

What is Section 16 of the Income-tax Act?

Section 16 of the Income-tax Act, 1961 allows for deductions from your salary income, which reduces your taxable income and in turn lowers your tax burden.

Section 16 offers three types of deductions:

1. Standard Deduction (Section 16(ia)): Employees in India are eligible for a standard deduction. This deduction is either Rs. 50,000 or their total salary, whichever amount is lower. It is a flat deduction that you can deduct from your salary. It is Rs. 50,000 for a financial year, so it does not depend on the number of jobs the employee changes during the year. 

Note: Budget 2023 was amended, allowing to claim a standard deduction of Rs 50,000 in the new regime as well. Thus, you will now be able to claim the standard deduction of Rs 50,000 both under the new and the old regime. 

2. Entertainment Allowance (Section 16(ii)): Entertainment allowance received by an employee is fully taxable and is initially included in the salary. Subsequently, the following deduction is to be made from gross salary:

However, deduction in respect of entertainment allowance is available in the case of Government employees only. The amount of deduction will be lower of:

(i) 1/5th of his basic salary, or

(ii) Rs. 5,000, or

(iii) Entertainment allowance received.

Note: Deduction in respect of entertainment allowance is only available if a person opts for the old tax regime.

3. Professional Tax (Section 16(iii)): Professional tax, a levy by your state government, can be deducted from your taxable income. But there are two key things to remember: 

•   You can only deduct the tax you actually paid in the previous year, and
•   There's a cap of Rs. 2,500 per person annually.

When the employer reimburses or directly pays the professional tax on behalf of the employee, the amount is initially considered as part of the employee's salary income. Subsequently, it is permitted as a deduction under Section 16 of the Income Tax Act.

         Note: Deduction in respect of professional tax is only available if a person opts for the old tax regime.

Deductions under Section 16 under the New Regime

Under the new regime, only Section 16(ia) is available, i.e., the standard deduction of Rs.50,000 is available irrespective of the regime opted. However, Section 16(ii), i.e., the entertainment allowance, and Section 16(iii), i.e., the professional tax deduction, are not allowed under the new regime.

Benefits of section 16

Claiming deductions under Section 16 helps you:

• Reduce your taxable income, leading to lower tax liability.
• Simplifies tax filing by eliminating the need to furnish receipts for specific expenses (transport allowance and medical reimbursement) covered by the standard deduction.

Related Articles:
Standard Deduction for Salaried Individuals in New & Old Tax Regime
Income From Salary – How To Calculate Income Tax On Salary With Example (FY 2023-24)