Section 16

A deduction from income subject to tax under head salaries is offered by section 16 of income tax act. It provides deductions for professional tax, entertainment allowance, & standard deduction.

What Is Section 16 Of Income Tax Act?

According to this clause, taxpayer whose income is classified as salary is required to deduct Rs. 40,000 from their income, whichever is lower, while calculating their taxable income. Clarification is required about representations received, such as whether taxpayer receiving pension from their previous company should be able to claim deductions. 
Under heading of salaries, taxpayer's pension from their previous employment is likewise taxable. As per Section 16, which has been revised since, any taxpayer who receives pension from their previous employer is eligible to claim deduction equal to pension amount of Rs. 40,000, plus whichever is less.

Types Of Deductions Allowed Under Section 16

Deductions from salary income are permitted under section 16 of income tax act 1961. This lowers your taxable income and, consequently, your tax liability.

Section 16 provides three categories of deductions:

1. Normal Calculation (Section 16(ia)): Indian workers are entitled to standard deduction. 50,000 rupees or their entire salary, whichever is less, is amount deducted. You can deduct it as flat amount from your pay. It is fixed at Rs. 50,000 for financial year, regardless of how many jobs person takes on in that year. 
2. Entertainment Allowance (Section 16(ii)): employee's entertainment allowance is initially included in their salary & is subject to full taxation. Then, from gross salary, following reduction must be made:
However, only government employees are eligible for deduction for entertainment expenses. deduction will be limited to lesser of (i) one-fifth of his base pay, (ii) five thousand rupees, or (iii) amount of entertainment allowance he received.
3. Professional Tax (Section 16(iii)): You may deduct professional tax from your taxable income. Professional tax is levy imposed by your state government. However, there are two important points to keep in mind: (1) There is annual cap of Rs. 2,500 per individual; & (2) You can only deduct tax you really paid in previous year.
 

What Is Standard Deduction Under Section 16?

The Conventional Inference Is permitted under Section ia of Section 16. It has been replaced with Rs. 15,000 medical reimbursement & Rs. 19,200 transport allowance. This was introduced by Finance Minister in 2018 budget. 
The travel allowance & medical reimbursement have been replaced with standard deduction of Rs. 40,000. taxpayer does not need to provide any bills or documentation of expenses in order to claim deduction of Rs. 40,000. It offers 40,000 rupee flat deduction. 
Later, deduction amount of Rs. 40,000 had risen to Rs. 50,000 in 2019 interim budget. It had therefore become Rs. 50,000. 
Pensioners might also choose for this basic deduction option.
 CBDT provided clarification regarding standard deduction's applicability to pensioners. Taxable under heading of salary is taxpayer's pension that they got from their previous employer. 
Pensioners would also be eligible for deduction under this provision as their pension has already been taxed under salary head.

Who Is Eligible For Standard Deduction?

Indian workers are entitled to standard deduction. 50,000 rupees or their entire salary, whichever is less, is amount deducted. You can deduct it as flat amount from your pay. It is fixed at Rs. 50,000 for financial year, regardless of how many jobs person takes on in that year. 
Note: Budget 2023 was modified, enabling new system to also allow for standard deduction of Rs 50,000. As result, you can now claim standard deduction of Rs 50,000 under both old & new tax regimes.

Section 16 Of Income Tax Act Benefits

By reducing your taxable income, you can minimize your tax liability by claiming deductions under section 16 of income tax act.

• Makes tax preparation easier by removing requirement to provide receipts for some costs (transport allowance & medical reimbursement) that are covered by standard deduction.

Entertainment Allowance Under Section 16 (Ii)

An employee's entertainment allowance is entirely taxable & is originally deducted from their pay. Then, from gross salary, following reduction must be made:
However, only government employees are eligible for deduction for entertainment expenses. amount deducted will be no more than lesser of: 
(i) one-fifth of his base pay; 
(ii) Rs. 5,000; or 
(iii) any entertainment allowance that was received.
 

Note: person can only claim deduction for entertainment allowance if they choose to use previous tax system.

Professional Tax Under Section 16 (Iii)

You can subtract professional tax, state-imposed levy, from your taxable income. However, there are two important points to keep in mind: 
(1) There is annual cap of Rs. 2,500 per individual; & 
(2) You can only deduct tax you really paid in previous year.
The professional tax is first included in employee's salary income when company reimburses them or pays it directly on their behalf. It is therefore allowed as deduction under Income Tax Act Section 16.

Note: person can only claim deduction for professional tax if they choose to use previous tax system.

Conclusion

Section 16 of Income tax Act, 1961, provides deductions on salary income to reduce taxable income. It includes standard deduction under Section 16(ia), which offers fixed deduction from salary income, & Section 16(ii), which allows government employees to claim entertainment allowance deduction. Additionally, Section 16(iii) offers deduction for professional tax paid by employees. These salary-related tax deductions, including standard deductions & allowances, provide significant employment income tax relief under Indian tax laws.