Buy a Life Insurance Plan in a few clicks
Create wealth through bonus payout from 1st policy year
A plan that offer guaranteed returns and financial protection for your family.
Kotak Guaranteed Fortune Builder
A plan that offers guaranteed income for your future goals.
Thank you
Our representative will get in touch with you at the earliest.
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
When tackling the world of income tax, particularly if you are a salaried individual or receiving a pension, Section 16 of Income Tax Act emerges as a crucial provision that needs thorough understanding. It is designed to offer some relief by reducing the amount of salary income you actually pay tax on. At its core, Section 16 allows for certain deductions directly from your gross salary or pension income for the standard deduction, entertainment allowance, and professional tax.
Section 16 of the Income Tax Act 1961 is a specific provision focused on individuals who earn income classified under the head “Salaries.” You can think of it as a rule that helps reduce the amount of salary income you actually pay tax on.
Its primary function is to allow certain deductions directly from your gross salary income. This means you get to subtract specific amounts before your final taxable income is calculated, potentially lowering your tax bill.
A major part of Section 16 is the Standard Deduction. This provision allows a taxpayer earning salary income a deduction for up to ₹40,000, or the actual salary amount, if it is less than that, when calculating their taxable income. It is important to know that this standard deduction amount gets updated periodically by the government.
Furthermore, this benefit is not just for current employees. Since pensions received from a former employer are also taxed under “Salaries,” pensioners are also eligible to claim this deduction under Section 16 against their pension income.
In essence, Section 16 of Income Tax Act simplifies tax calculations for the salaried class by providing a straightforward deduction. It acknowledges that earning a salary often involves associated expenses, and the Standard Deduction offers relief for that without needing detailed proofs for most common expenses.
Standard deductions under Section 16(ia) of Income Tax Act offer an easy way for salaried individuals in India to reduce their taxable income. It is that straightforward, no-questions-asked amount you can subtract directly from your gross salary or pension income. By offering this flat deduction, the aim is to provide immediate, broad-based relief, making the tax calculation process a little easier and your tax burden a little lighter, directly impacting your net taxable income each year.
It includes the following deductions under it:
As a salaried taxpayer, every financial year, you can claim the lower amount between the following as the standard deduction from your total salary:
You can claim this deduction as an exemption regardless of your actual spending. The government introduced this benefit in place of:
In the case of entertainment allowance, the assessee is entitled to deductions u/s 16, although he is ineligible for any exemptions (ii). Due to the inclusion of the entire entertainment allowance in the gross income calculation, the government employee is qualified to receive a deduction from gross salary.
The standard deduction is also available for the pensioners, according to the new guidelines of CBDT clarifying the applicability of the standard deduction for the pensioners. The pension received by the employer will be headed under the head of ‘salaries.’
The deduction for employment tax is allowed by Section 16(iii) of Income Tax Act. A taxpayer may deduct the sum paid on account of an employment tax or professional tax under section 16. The tax on employment under section 16(iii) is described in this case by Article 276(2) of the Constitution.
The state cannot charge more than ₹2500 per year as professional tax. The laws allow this taxation as a deduction from salary, as per.
If your employer paid the professional tax on your behalf, the amount is included in your salary.
Financial Year?
The standard deduction is a fixed sum applicable to your overall income for the entire financial year.
For example, suppose you earned ₹50,000 net salary under one employer from April to September. Then, you changed jobs and earned ₹50,000 under your second employer up to the month of March. Thus, your total salary income for the financial year from April to March is ₹(50,000 + 50,000) = ₹1,00,000.
Therefore, you are entitled to a standard deduction of ₹50,000
Your net salary this fiscal year = ₹(1,00,000 – 50,000) = ₹50,000.
The standard deduction under Section 16 vs. income tax deductions under Chapter VI-A, including Section 80:
Standard Deduction | Chapter VI-A Deductions |
---|---|
It is a flat deduction regardless of actual expenditure. | These deductions are based on actual expenses or investments. |
This deduction is available only to individuals earning salary income or pension. Self-employed taxpayers, professionals, or business owners cannot claim this benefit. | These deductions are available on the gross income, which is the sum of the earnings from all income sources. |
This deduction is applied to the salary income before computing the gross income. | These deductions are applied after arriving at the gross income. |
The limit is fixed at ₹50,000. | The limits vary from section to section. For example, Section 80C allows deductions up to ₹1,50,000. |
The government introduced the standard deduction in the 2018 Union Budget to provide tax relief to salaried individuals. Later, in 2019, the finance ministry raised the limit to ₹50,000.
Before 2018, you could claim reimbursements for the transportation expenses incurred on work-related travel and medical bills. However, those deductions were limited to:
Thus, the total amount you could reduce from your gross salary through such benefits was ₹(15,000 + 19,200) = ₹34,200.
Therefore, with the new standard deduction, the extra tax benefit has become (₹50,000 – ₹34,200) = ₹15,800.
For example, suppose your salary details are as follows:
Total income = ₹(5,00,000 + 2,00,000) = ₹7,00,000
Gross total income = ₹7,00,000 – ₹(24,000 + 50,000) = ₹6,26,000
Before standard deduction,
Deductions available on your gross income: ₹(19,200 + 15,000) = ₹34,200
Thus, your taxable income: ₹(6,26,000 – 34,200) =₹ 5,91,800
Your total tax outgo as per current income tax slab rates (old tax regime):
After standard deduction
Therefore, the standard deduction helps you save on taxes.
Moreover, your employer need not process any bills before you can avail of this tax break. Thus, this facility eliminates elaborate paperwork, making tax calculations straightforward.
Section 16 of the Income Tax Act is an important part of the tax regime, especially if you earn a salary or pension. Emerging as a helping hand from tax liability, it allows you to reduce the amount of salary or pension income you actually pay tax on. The most common way it does this is through the Standard Deduction, which is the set amount you can deduct without needing lots of paperwork, and by letting you claim any Professional Tax you’ve paid. Indeed, armed with a clearer understanding of provisions like Section 16, especially the nuances of deductions such as the Standard Deduction and Professional Tax, you are not just avoiding confusion; you are empowering yourself. Moreover, staying updated through official government notifications or consulting with a tax professional becomes an essential part of this proactive approach, particularly when amendments are introduced.
1
Section 16 provides deductions that salaried individuals can claim to reduce their taxable income. These deductions include:
2
It is important to know that only government employees (central or state) can claim deductions on entertainment allowances under Section 16(ii). They can claim the lowest amount out of these three:
3
The standard deduction is a fixed amount you can subtract from your gross salary before calculating income tax. It appears on your payslip to reflect the deducted amount.
4
The standard deduction amount is fixed by the government and may change from year to year. You can find the current standard deduction amount on the Income Tax Department website.
5
No, you cannot claim medical or transport allowances along with the standard deduction under Section 16(ia). The standard deduction is a comprehensive deduction that covers various expenses, including transport and medical bills.
6
All salaried individuals in India are eligible for the standard deduction u/s 16(ia), regardless of their employer (government or private).
Pay 10,000/month for 10 years, Get 1,65,805/Year* for next 15 years.
ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
Start saving today and enjoy guaranteed returns with our Savings Plans!