Deductions from Salaries Under Section 16

Salaries, Tax Ready Reckoner

Section 16 allows three key deductions from gross salary income before computing taxable salary. These deductions help reduce the overall tax liability for salaried individuals.

Table of Contents

1. Standard Deduction [Section 16(ia)]

Amount: ₹50,000(for both salaried employees and pensioners).
Applicability:
- Available under the Old Tax Regime(not in New Tax Regime from FY 2023-24).
- Automatically deducted from gross salary before calculating taxable income.
Purpose: Replaces transport allowance (₹19,200) and medical reimbursement (₹15,000), which were discontinued.

2. Entertainment Allowance Deduction [Section 16(ii)]

Only for Government Employees: Private sector employees cannotclaim this.
Deduction Amount: Least of the following:

Actual entertainment allowance received.
₹5,000per annum.
20% of basic salary.

Example:

Basic salary = ₹5,00,000
Entertainment allowance received = ₹30,000
Deduction allowed= ₹5,000 (since ₹5,000 < ₹30,000 and < 20% of ₹5,00,000 = ₹1,00,000).

3. Professional Tax Deduction [Section 16(iii)]

What is Professional Tax?A state-level tax on employment (varies by state).
Deduction Amount: Actual amount paidduring the year (no upper limit).

Conditions:

Must be paid by the employee(if deducted by employer, it is already excluded from salary).
Must be paid before March 31of the financial year.

Example:

Professional tax paid in Maharashtra = ₹2,500/year → Fully deductible.

4. Summary of Deductions Under Section 16

DEDUCTION	WHO CAN CLAIM?	MAXIMUM AMOUNT	TAX REGIME APPLICABILITY
Standard Deduction [16(ia)]	All salaried employees & pensioners	₹50,000	Old Regime only
Entertainment Allowance [16(ii)]	Only government employees	Lower of ₹5,000 or 20% of basic salary	Old Regime only
Professional Tax [16(iii)]	All employees (if paid by employee)	Actual amount paid	Both Old & New Regime

Key Points :

Standard Deduction (₹50,000)is the most beneficial for most salaried individuals.
Entertainment Allowanceis only for government employees (max ₹5,000).
Professional Taxis deductible if paid by the employee (not if deducted by employer).
New Tax Regime (from FY 2023-24) removes Standard & Entertainment Allowance deductions.

For tax planning, salaried employees should compare Old vs. New Regime to choose the best option.