• Shruti Sharma

Section 16 of Income Tax Act, 1961- Deductions from salaries.

Updated: Oct 7

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#incometaxact

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The Income Tax Act of 1961, Section 16, allows for a deduction from income subject to tax under the heading "salaries." It offers deductions for professional taxes, entertainment expenses, and the standard deduction. A salaried taxpayer can reduce their taxable salary income that is subject to tax by using this deduction.


Before your net taxable income, Section 16 of the Income Tax Act is applicable. As a result, before determining your tax due for the year, you must take the following deductions into account:


  • 1. Standard Deduction

You can deduct a set amount from your taxable pay as the standard deduction. The lesser of the following two may be subtracted:


(i)Rs 50,000

(ii)The amount of your salary


  • 2. Entertainment allowance deduction

You can also deduct your entertainment allowance from your taxes. This allowance shall be first added to your salary income under the head “Salaries”. Following that, you may deduct it under the following circumstances:


Government Employees

If you work for the federal or state government, you may deduct the lesser of the following amounts:

(i)₹ 5,000

(ii)20% (1/5th) of Basic Salary, or

(iii)Amount of the entertainment allowance


A deduction for entertainment expenses is not available for private sector employees.


Employees of Statutory Corporations and Local Authorities are not eligible to deduct their entertainment expenses.


To determine how much of your entertainment allowance can be deducted from your pay, it's vital to take into account the following factors:


1. No allowances, benefits, or other perks shall be included in the salary.


2. You cannot claim a deduction for your entertainment-related expenses.


3. You can use the entertainment allowance you were given to cover the costs you spend.


  • 3. Employment Tax or Professional Tax

In India, states have the authority to levy an income tax on professionals. This state government tax may be deducted from your overall tax obligation to the federal government for the year.


The most that state governments may withhold as professional tax in a year is Rs 2500. As a result, this is the maximum deduction you may make under this heading.


In the 2018 Union Budget, the government had made the standard deduction a provision. The main advantage of this clause is that it lowers tax obligations for taxpayers who earn a living. In the Union Budget 2019, the Finance Ministry increased the threshold for a deduction under Section 16 of the Income Tax Act from 40,000 to 50,000.


You may now claim the deduction up to 50,000 in accordance with the new standard deduction rule. This results in an additional tax benefit to you of $15,800 (50,000 - $34,200). Your net tax obligation is significantly impacted by this relatively little tax benefit.

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