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ARN. No. KLI/23-24/E-BB/1201
Features
Ref. No. KLI/22-23/E-BB/999
Deductions under Section 16(ia) can help individuals reduce their taxable income while remaining in legal compliance with the Income Tax Act 1961.
Section 16 of the Income Tax Act (ITA), 1961 deals with deductions allowed from income under the head “Salaries”. These deductions help reduce salaried individuals’ taxable income, thereby lowering their tax liability.
Section 16 provides a deduction for professional taxes, entertainment expenses, and the standard deduction. A salaried worker who pays taxes could use this deduction to reduce the amount of taxable salary income that is subject to tax.
Section 16 of Income Tax Act, of 1961, allows deductions for salaried individuals in India to calculate their taxable income. It lowers the amount of your salary that can be taxed by the government. Under Section 16, three main types of deductions are allowed: standard deduction, entertainment allowance, and professional tax.
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 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 a deduction under Section 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 of 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 employment tax 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.
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 = ₹(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 standard deduction under Section 16(ia) is not a calculated value based on your salary. It is a fixed amount provided by the government to simplify tax calculations and reduce taxable income for salaried individuals. As per the Income Tax Act 1961, the current standard deduction amount is ₹50,000.
All salaried individuals are eligible for the standard deduction under Section 16(ia). Regardless of your employer being in the government or private sector, or whether you are a regular employee, pensioner, or professional receiving a salary income, you can avail of the benefits of this section.
Here is the list of individuals who can claim the deduction under Section 16(ia):
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 travels 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.
The income tax laws consider pensions received from former employers as income under the head ‘Salaries’. Thus, if you are a pensioner, you can claim ₹50,000 or your pension amount, whichever is less, as the standard deduction.
As a pensioner, you might not enjoy transport or medical expenses allowances. Thus, with a standard deduction, you can get significant tax relief.
Claiming a standard deduction under Section 16 of the Income Tax Act of 1961 is a straightforward process, but the specific steps might vary depending on your chosen filing method.
Usually, your employer includes this deduction when calculating the tax deducted at source (TDS) applicable on your annual salary. Form 16 that your employer issues should reflect this amount. However, if it is not included, you can claim the standard deduction while filing your tax return.
Remember that you must be a salaried individual or pensioner filing an income tax return under the old tax regime (not the new tax regime under section 115 BAC). Claiming the deduction:
The standard deduction requires no documents. You need not submit any proof of expenses to your employer or the tax department to get this tax break.
If you are a Central Government or State Government employee, you can claim deductions towards entertainment allowance from your salary. The available deduction is the least among
For non-government employees, entertainment allowance is not applicable.
Some Indian states levy a professional tax or direct tax on employment under Article 276(2) of the Indian Constitution. Any individual earning an income needs to pay this tax. The state cannot charge more than ₹2,500 per year as professional tax.
The tax laws allow this taxation as a deduction from salary, as per the following rules:
For example, suppose your base pay is ₹2,50,000.
You have to pay ₹400 as professional tax per month, and your employer pays the amount.
Then, the gross salary you received is ₹2,50,000 + ₹(400 X 12) = ₹2,54,800.
The amount you can deduct from it on account of professional tax = is ₹4,800.
Thus, your net salary income = ₹2,50,000.
If your employer deducted the tax from your salary, you did not receive the money from your employer. Therefore, you need not add the amount to your income under the heading ‘Salaries.’
Suppose your annual income is ₹2,50,000. You pay a professional tax of ₹5,000 from it during the year. Thus, you can deduct ₹5,000 from the salary you received.
Thus, this financial year, ₹3,000 is deductible, not just ₹2,500.
Section 16 of Income Tax Act (ITA), 1961 serves several important purposes:
Section 16 of the Income Tax Act (ITA), 1961, is a crucial pillar of the taxation framework. It combines the requirements of government revenue, fairness, and administrative efficiency together. It can be seen as a tool used by the government to both benefit taxpayers and facilitate efficient tax collection. However, the specific deductions offered under any section are subject to change based on government policies and economic conditions. It is important to keep an eye out for any changes and avoid confusion during the tax filing season.
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 under Section 16(ia), regardless of their employer (government or private).
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
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.
