Section 16 of Income Tax Act

Section 16 provides a deduction from the income chargeable to tax under the head salaries. It offers deductions for the standard deduction, entertainment allowance, and professional tax.

With this deduction, a salaried employee who pays tax could lower the taxable salary income chargeable to tax. 

What is Section 16 of the Income Tax Act?

Under this provision, a taxpayer who has the income that is charged under salaries should allow a deduction of Rs. 40,000 or the salary amount, whichever one is lesser for the computation of the taxable income. The representations received need clarification - such as whether a taxpayer, who gets a pension from the former employer, should be eligible for claiming the deductions. 

A taxpayer's pension from the old employer is also taxable under the head of salaries. Any taxpayer who gets a pension from the former employer is entitled to claim the deduction that is the pension amount of Rs. 40,000, and also whichever is lesser according to Section 16, which has been updated since.

Standard Deduction Under Section 16

The Standard Deduction Under Section 16 is allowed under Section ia. It has been replaced by the transport allowance of Rs. 19,200 and the medical reimbursement of Rs. 15,000. In the 2018 budget, the finance minister introduced this. 

It has provided a standard deduction of Rs. 40,000 in the place of the transport allowance and the medical reimbursement. The deduction of Rs. 40,000 will not need a taxpayer to give any bill or proof of the expenditure. It provides a flat deduction of Rs. 40,000. 

Later, in the interim budget of the year 2019, the deduction amount of Rs. 40,000 had increased to Rs. 50,000. Therefore, it had become Rs. 50,000. 

This standard deduction option is also available to pensioners. The clarification was issued by the CBDT and clarified the applicability of the standard deduction to pensioners. The pension that has been received by the taxpayer from the former employer would be chargeable to tax under the head of salaries. 

Since the pension that is received has been taxed under the salaries head, the deduction would also be available to the pensioners under this section.

Entertainment Allowance

Following the inclusion of the entertainment allowance in pay income, a deduction is given based on a few factors. The benefit must be a payment made by the employer to the employee explicitly for entertainment purposes.

For the Government Employee

The least of the following deductions is available to central government and state government employees:

  • 20% of the basic salary
  • A Maximum Deduction of Entertainment Allowance is Rs. 5,000

A taxpayer must make sure the following conditions are met in order to determine the allowance:

  • Any additional allowances, benefits from the employer or perks must not be included in the salary. In essence, the payment must be the total amount earned without taking into account any benefits.
  • Never take into account the real amount spent from the employer-provided entertainment allowance.

For Non-Government Employees

Non-government employees are not eligible for the entertainment allowance deduction. Only employees of the Central or State Government are qualified for the deduction. Additionally, employees of statutory businesses and local governments are ineligible for the deduction.

Professional Tax Under Section 16

Section 16(iii) of the Income Tax Act permits the deduction for tax on employment. Under section 16, a taxpayer may deduct the amount paid on account of an employment tax or professional tax.

Here, Article 276(2) of the Constitution specifies the employment tax.

The following considerations must be made when computing professional tax deductions:

  • Only during the financial year in which the professional tax is actually paid to the government may the taxpayer claim the deduction.
  • A deduction is also allowed for the tax that the employer paid on the employee's behalf. Here, the professional tax payment made by the employer will be deducted from the total salary before being added. Later, section 16 will permit a deduction for an amount equal to that amount.
  • There is neither an upper nor a lower limit to the deduction under Section 16 of the Income Tax Act. The deduction is only subject to the professional tax's actual amount.
    Any state government, however, is not permitted to impose a professional tax of more than Rs. 2500 per year. Only the tax paid, not the interest or late payment penalty for the delay or nonpayment of professional tax, is eligible for deduction.
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