Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

[Section 16]- Deductions from Salaries – for computing Salary Income

So far, we have discussed what are the various incomes, allowances and perquisites which are  exempt and which are to be included in gross salary. From the gross salary so computed, the following  three deductions are allowed under section 16:

(1)          Standard deduction [Section 16(ia)]

(2)          Entertainment allowance [Section 16(ii)]

(3)          Tax on employment [Section 16(iii)]

[Section 16]- Deductions from Salaries  – for computing Salary Income
[Section 16]- Deductions from Salaries – for computing Salary Income

(1)  Standard deduction [Clause (ia) inserted in section 16]

In order to provide relief to salaried taxpayers, standard deduction has been reintroduced w.e.f.  assessment year 2019-20 by inserting clause (ia) in section 16. Thus while computing the income  chargeable under the head “salary” besides other deductions provided in section 16(ii) and (iii), the  following deduction shall also be provided:

(ia)         a deduction of ₹50,000 (₹40,000 for A.Y. 2019-20)

or

the amount of the salary,

whichever is  less. 

(2) [Section 16(ii)]-      Entertainment Allowance

As already discussed, entertainment allowance is first included in computation of the  gross salary. A deduction is then allowed under section 16(ii) if conditions prescribed have been  satisfied.

(3)  [Section 16(iii)]- Tax on Employment (Professional Tax)

As per the Constitution of India, the State Governments/Local Authorities are empowered to make  law and collect taxes on professions, trades, callings and employment.

As per section 16(iii), a deduction of any sum paid by the assessee, on account of a tax on  employment, shall be allowed. The deduction will be allowed in the year in which the tax is actually  paid by the employee.

Note :

1.            Where professional tax is paid by the employer on behalf of the employee, it will first be included in his  gross salary as a perquisite, being a monetary obligation of the employee discharged by the employer.  Thereafter, a deduction on account of such professional tax will be allowed to the employee from his gross  salary. 

2.            Professional tax due but not paid shall not be allowed as deduction. 

Amendment made by the Finance Act, 2020 

If an employee opts to be taxed as per the new alternative regime under section 115BAC, he will  not be entitled to claim deductions under all the clauses of section 16 discussed above.

See also  Agricultural Income & Its Tax Treatment [Section 2(1A) and 10(1)]
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