Deductions from Salaries under Section 16: A Comprehensive Guide

Deductions from Salaries under Section 16 are

Standard Deduction [Section 16(ia)]

As per the provisions of section 16 (ia) a standard deduction is allowed against the salary income subject to a limit of ₹ 50,000/- or the amount of salary whichever is less. Since the pension received was taxed under the salary heading, the deduction is also available to pensioners under this section.

It may be noted that such deduction is only available to a tax payer opting old income tax regime, but During the union budget 2023 speech on 01st February, 2023 Honorable Finance Minister Smt. Nirmala Sitharaman Ji has proposed to extend the benefit of standard deduction in the new income tax regime also for salaried class.

Entertainment Allowance [Section 16(ii)]

Entertainment allowance is a taxable allowance and forms a part of the taxable salary. However, Government employees who are in receipt of such an allowance are eligible for a deduction in respect of the entertainment allowance received by them to the extent of the least of the following:

• • ₹ 5,000/-
  • 20% of the base salary (salary excluding allowances or benefits or perquisites)
  • Actual entertainment allowance received

The actual expenditure incurred for the purposes of entertainment is not relevant to the calculation of the deduction. No such deduction is available to employees other than Government employees.

Tax on Employment [Section 16(iii)]

• • Certain Indian States levy a tax on employment commonly known as Profession tax which is required to be recovered by the employer from the salary paid to the employee and deposited into the treasury. Such tax paid by an employee is allowed as deduction from his Salary.
    
    
  • Deduction is available in the year in which profession tax is actually paid, regardless of which year the profession tax pertains to.
    
    
  • If Profession Tax is reimbursed/borne by the employer, then such Profession Tax reimbursed/borne by the employer is first included in the taxable income as a perquisite & then allowed as deduction under section 16. According to this, there is no maximum or minimum deduction.
    
    The deduction is based only on the actual amount of business tax. However, no state government can impose employment tax over Rs 2,500 per year. Only tax paid is creditable. Interest and late fees on delinquent or unpaid business tax are not.