While filing income tax returns, salaried individuals need to calculate their net taxable income under the head ‘Income from Salary.’ The Indian Income Tax Act 1961 offers many deductions and allowances to reduce taxable income.
One such tax-saving provision allowing you to reduce your tax burden is Section 16 of the Income Tax Act.
Section 16 of the Income Tax Act provides deductions and allowances from income subject to tax under the head for salaries. Salaried individuals can claim this deduction regardless of the tax slab they fall under. A pensioner receiving a pension from their former employer can also claim the deduction.
The objective of Section 16 is to help salaried taxpayers lower their taxable salary income. However, it is vital to note that only the old tax regime permits you to avail of all of these deductions and the deductions under Section 80C.
If you file your return under the new tax regime, you cannot claim the deductions for entertainment allowance and professional tax.
There are three components under Section 16 for tax deductions:
Section 16 (ia) of the Income Tax Act allows for a flat deduction on salary income. Until 2018, standard deductions comprised a medical reimbursement of ₹15,000 and a transport allowance of ₹19,200, totalling an amount of ₹34,200. However, the finance minister increased it to ₹40,000, deducted from the gross salary before tax calculations.
The standard deduction under Section 16 (ia) was further increased to ₹50,000 in the Interim Budget 2019. This alteration helped to provide a higher tax relief to salaried individuals. In the Union Budget 2023, the standard deduction under Section 16 (ia) of 50000 was incorporated into the new tax regime as well.
The deductions for entertainment allowance are different from the deduction under Section 16 (ia) since they are available to government employees only. Individuals receive an entertainment allowance from their employers, on which they can later claim deductions based on specific criteria.
Employees of the central or state government can claim the least of the following as deductions:
Let us understand the calculations with the help of an example:
| Particulars | Amount |
|---|---|
| Basic Salary | ₹1,50,000 |
| Entertainment allowance received for the financial year | ₹15,000 |
| Amount of deduction available: | |
| ₹5,000 (a) | ₹5,000 |
| 20% of basic salary (b) | ₹30,000 |
| Total amount received as entertainment allowance in a financial year (c) | ₹15,000 |
| The amount claimable as a deduction (the least of a, b, and c) (b) | ₹5,000 |
Section 16 (iii) of the Income Tax Act 1961 permits deductions on professional tax or tax on employment levied by state governments under Article 276(2) of the Constitution. All salaried individuals are entitled to the deduction, provided they have paid a professional tax during the financial year.
There is no ceiling on this deduction in monetary terms. Thus, you can claim the entire professional tax you pay in deductions. The deduction is claimable even if the employer pays the professional tax.
Every taxpayer should have information about the benefits and provisions available to them for filing income tax returns. This knowledge helps in lowering your taxable income. Section 16 of the Income Tax Act 1961 offers provisions for the deduction of salaries and their components for tax purposes.
You can enjoy standard deductions, entertainment allowance, and professional tax deductions. But make sure you understand the applicability of these provisions to ascertain maximum tax benefits.
PNB MetLife offers different tax-saving instruments, like life insurance plans, to help lower your tax liabilities.Enjoy tax savings along with financial security with PNB MetLife life insurance plans.
No. The entertainment allowance deduction is only for state and central government employees.
No. You do not need to submit any bills as proof. The standard deduction is received by default.
Disclaimer:
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
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