Under the Income Tax Act, 1961, specific deductions are permitted while calculating an individual’s total income. Section 16 focuses on deductions that can be subtracted from an employee’s gross salary. Continue reading to understand the deductions available 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 provides deductions from salary income, helping reduce taxable income and thereby lowering the tax liability.
This section includes three primary types of deductions:
1. Standard Deduction (Section 16(ia))
Employees in India are entitled to a standard deduction. This deduction is fixed at ₹50,000 or the employee’s total salary, whichever is lower. It is a flat deduction and remains ₹50,000 for the entire financial year, regardless of the number of jobs held during that period.
Note: The Budget 2023 introduced an amendment allowing the standard deduction of ₹50,000 under both the old and the new tax regimes. Therefore, employees can now claim this deduction in either regime.
Illustration
| Particulars | Until AY 2018-19 | From AY 2019-20 | From AY 2020-21 |
| Gross Salary (₹) | 8,00,000 | 8,00,000 | 8,00,000 |
| (-) Transport Allowance | 19,200 | Not Applicable | Not Applicable |
| (-) Medical Allowance | 15,000 | Not Applicable | Not Applicable |
| (-) Standard Deduction | Not Applicable | 40,000 | 50,000 |
| Net Salary | 7,65,800 | 7,60,000 | 7,50,000 |
2. Entertainment Allowance (Section 16(ii))
The entertainment allowance received by an employee is fully taxable and is first included in the salary. After that, a deduction can be claimed from the gross salary. This deduction is available only to Government employees. The amount deductible is the lowest of the following:
- 1/5th of the basic salary, or
- ₹5,000, or
- The actual entertainment allowance received.
Note: This deduction is allowed only if the employee chooses the old tax regime.
3. Professional Tax (Section 16(iii))
Professional tax is a state-imposed levy and can be deducted from your taxable salary. However, keep the following points in mind:
- You can only claim a deduction for the amount actually paid during the previous year.
- The maximum allowable deduction is ₹2,500 per person in a financial year.
If the employer pays or reimburses the professional tax on behalf of the employee, the amount is first added to the employee’s salary income. It is then allowed as a deduction under Section 16 of the Income-tax Act.
Note: The deduction for professional tax can only be claimed under the old tax regime.
Deductions Under Section 16 in the New Tax Regime
In the new tax regime, only the deduction under Section 16(ia) is permitted, which is the standard deduction of ₹50,000. This is available regardless of whether an individual opts for the old or new regime. However, deductions under Section 16(ii) for entertainment allowance and Section 16(iii) for professional tax are not allowed in the new regime.
Benefits of Section 16
Claiming deductions under Section 16 helps in the following ways:
- Lowers taxable income, resulting in reduced tax liability.
- Makes tax filing easier by removing the requirement to submit receipts for specific expenses such as medical reimbursement and transport allowance, as these are included under the standard deduction.
FAQ’s
1. What is the standard deduction for AY 2024-25?
The standard deduction for Assessment Year 2024-25 is ₹50,000.
2. Do I need to provide proof of expenses to claim the standard deduction?
No, you do not need to submit any receipts or proof of expenses to claim the standard deduction.
3. Who is eligible to claim the entertainment allowance deduction under Section 16(ii)?
The deduction for entertainment allowance under Section 16(ii) is available only to Government employees.
4. Who can avail the standard deduction under Section 16?
All salaried individuals and pensioners, whether from the private or government sector, are eligible to claim the standard deduction under Section 16.
5. Can I claim transport allowance and medical allowance in addition to the standard deduction?
No, only the standard deduction of ₹50,000 can be claimed. Transport allowance and medical allowance cannot be claimed separately.
6. Is the standard deduction available under both old and new tax regimes?
Yes, the standard deduction of ₹50,000 is available under both old and new tax regimes from FY 2023-24 onward.
7. Can pensioners claim the standard deduction under Section 16?
Yes, pensioners receiving a taxable pension from their former employer are also eligible to claim the standard deduction.
8. Is the entertainment allowance deduction available in the new tax regime?
No, the deduction for entertainment allowance under Section 16(ii) is allowed only under the old tax regime.
9. What is the maximum deduction allowed for professional tax under Section 16(iii)?
A maximum of ₹2,500 per financial year can be claimed as a deduction for professional tax under Section 16(iii).
10. Can private-sector employees claim entertainment allowance deduction under Section 16(ii)?
No, this deduction is restricted to Government employees only.
11. Do I need to submit Form 16 to claim Section 16 deductions?
Form 16 is not required to claim the deduction itself, but it helps verify salary details and deductions when filing your income tax return.
12. Is Section 16 deduction automatically applied by employers?
Yes, in most cases, employers factor in the standard deduction while calculating TDS on salary.
13. Can freelancers or self-employed individuals claim Section 16 deductions?
No, Section 16 deductions are available only for salaried individuals and eligible pensioners, not for freelancers or self-employed persons.
14. Can I claim professional tax deduction if my employer pays it on my behalf?
Yes, even if the employer pays professional tax for you, it is first added to your salary and then allowed as a deduction under Section 16.
