What is Section 16 - Deductions Under Section 16 | SBI Life
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Section 16 of the Income Tax Act

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What is Section 16 - Deductions Under Section 16 | SBI Life

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What is Section 16 - Deductions Under Section 16 | SBI Life

Any income you earn and exceeds the exempted limit, as laid by the Government is taxable. To help reduce the tax liability, there are certain deductions that can bring down your taxable income, especially when it comes to income from salary.

So how do you find these deductions in your salary slip?

On your income receipt slip, you will see how your income is distributed. Heads like Basic Salary, Dearness Allowance or DA, House Rent Allowance or HRA, Conveyance, etc. will be mentioned. Apart from this, you may also see certain deductions on it.

This can include Employee Provident Fund (EPF), Tax Deducted at Source or TDS, and Professional Tax. You can also find this information in your Form 16, which your employer will issue annually.

EPF falls under Section 80C and the TDS deduction brings down the overall taxable income. One such deduction falls under Section 16 of the Income Tax Act. The Standard Deduction, Professional Tax, and Entertainment Allowance are covered as deductions, which you can claim under Sec 16.

As a taxpayer, it is important to know what is Section 16 and how these deductions can help you bring down the tax liability while filing your tax returns.

 

What is Section 16 of the Income Tax Act?

Various deductions can be claimed from your salaries. Just as there are sub-sections of deduction under Section 80, there are also some permitted deductions under Section 16.

These deductions include-

a. Standard Deduction b. Entertainment Allowance c. Professional Tax Paid.

These amounts will be deducted from the total income you receive as Salary from your employer only. Also, these deductions can only be claimed if the taxpayer is filing Income Tax Returns under the old tax regime. Section 115BAC (new tax regime) allow you to claim only standard deductions and no other deduction.

 

Deductions Under Section 16 - Explained

To claim the deduction u/s 16, you will need to first look at the salary you receive. Though certain allowances may not be mentioned in your salary slip, you can still ask your employer to clarify if these components are a part of your deduction or not.

Standard Deduction: Although it was eliminated in 2008, the government of India re-introduced standard deduction in the Finance Bill of 2018. It replaced the transport allowance of Rs 19200 and medical reimbursement of Rs 15000.

The amount that could be claimed as Standard Deduction u/s 16(ia), in 2018 was Rs 40,000 per annum, which was increased in the budget of 2019 to Rs. 50,000 per annum.

Instead of claiming, two different amounts as reimbursement and exemption, standard deduction under section 16 (ia) allows all salaried employees to claim one fixed amount. Irrespective of the amount you spend, you can claim this fixed deduction. You also do not need to produce any investment proof or bills to claim this deduction.

The amount you can deduct is Rs 50,000 per year or the amount of the salary; whichever is the less amount.

 

How can you claim a standard deduction?

To calculate standard deduction Under Section 16(ia) of the Income Tax Act, you will first need to look at how the tax was calculated when travel and medical allowance were allowed.

Let’s assume your gross income is Rs 7 lakhs. If you need to calculate your taxable amount before applying for exemptions under Section 80C, you will need to calculate this with and without standard exemptions.

All amounts in Rs Assessment Year
2018-2019
Assessment Year
2019-2020
Assessment Year
2020-2021
Total Income in Rs 7,00,000 7,00,000 7,00,000
(Less) Medical Allowance 15,000 - -
(Less) Travel Allowance 19,200 - -
(Less) Standard Deduction - 40,000 50,000
Net Income in Rs 6,65,800 6,60,000 6,50,000
 

Despite two allowances given in the previous years, a flat rate of standard deduction brings down your net income further.

 

Entertainment Allowance

Another deduction that forms a part of Section 16 (ii), is the Entertainment allowance. It is the additional amount that the salaried individual may receive as a part of his gross income. However, what needs to be noted is that only government employees, central and state, can claim entertainment allowance. This tax exemption cannot be enjoyed by employees of a private organization.

Expenses incurred on any hospitality charges including meals, stay, movies, etc. can be claimed as entertainment expenses for purpose of tax deduction under section 16 (ii).

The exemption limit that can be claimed is-

a. Rs 5000 b. 20% of the basic salary; c. Actual Amount received, whichever is lower.

To calculate the entertainment allowance, you will need to know the basic salary, and the allowance extended to you per year.

Particulars Amount in Rs
Basic Salary Per Annum 1,50,000
Entertainment Allowance Per month 500
a.Annual Entertainment Allowance Received =500*12= 6000
b. 20% of the Basic Salary, or 30,000
c. Exemption Limit 5000
Deduction that can be claimed (lower of a or b or c) 5000
Amount Taxable after deductions 6000-5000= 1000
 

Tax on Employment or Professional Tax

Amount paid as professional tax by the salaried employee can also be deducted from the taxable income. Professional Tax or PT is a direct tax that is paid to the state government and is categorized under Section 16 (iii).

It is applicable to most professions and trades; apart from salaried individuals. Before salary is credited to an individual, the employer will deduct this amount from the total income.

Once the deduction is done, it is the responsibility of the employer to pay the deducted amount to the respective state governments.

The amount of tax that is to be deducted from the salary is not fixed and it depends on the state where you work. It also depends on the income slab of the individual. This means states have their own rate of PT on salary. However, the maximum amount of deduction that is applicable is Rs 2500.

You can check your Form 16 to know if your professional tax has been deducted from your salary.

Conclusion

Claiming deductions under Section 16 can considerably bring down taxable income.

Let’s assume Mr A earns a salary of Rs. 7,00,000 and he is filing his taxes under the old tax regime.

 
Description Amount in Rs
Annual Income 7,00,000
Amount exempted from tax 2,50,000
Standard Deduction under Section 16(i) 50,000
Professional Tax exemption under Section 16(iii) 2500
Entertainment allowance exemption under Section (ii) Only for government employees 5000
Taxable income (for non-government employees) 3,97,00
Taxable income (Government employee) 3,92,00
 

It is always better to read the tax and savings guide before filing your tax returns so that you can bring your tax liability down.

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