Section 16 of the Income Tax Act, 1961, provides for specific deductions from the salary income of an individual. These deductions are available to all salaried taxpayers and help reduce the taxable salary income. The deductions under Section 16 include:
1. Standard Deduction [Section 16(i)]
The standard deduction is a flat amount that is allowed as a deduction from the gross salary. From AY 2020-21, the standard deduction is ₹50,000.
2. Entertainment Allowance [Section 16(ii)]
Entertainment Allowance is available only to government employees (i.e., Central and State Government employees). Non-government employees are not eligible for this deduction.
The least of the following three amounts is allowed as a deduction:
- ₹5,000.
- 1/5th of basic salary.
- Actual entertainment allowance received.
3. Professional Tax [Section 16(iii)]
The amount of professional tax (also known as employment tax) actually paid by the employee during the financial year is allowed as a deduction.
₹2,500 or amount received whichever is lesser would be considered as deduction amount
Note: The deduction is available only if the professional tax has been paid. If the employer pays the professional tax on behalf of the employee, it is first included in the employee’s salary income and then allowed as a deduction under this section.
Example Calculation:
Assume an employee has the following salary details for a financial year:
Gross Salary: ₹8,00,000
Entertainment Allowance (for a government employee): ₹10,000
Professional Tax Paid: ₹2,400
Computation of Gross Total Income
| Pariculars | Amount (₹) | Amount (₹) |
|---|---|---|
| Gross Salary | 8,00,000 | |
| Less : Deduction U/s 16 | ||
| Standard Deduction | 50,000 | |
| Entertainment Allowance (As per Calculation in Note 1) | 5,000 | |
| Professional Tax (As per Calculation in Note 2) | 2,400 | |
| Total Deduction u/s 16 | (57,400) | |
| Gross Total Income | 7,42,600 |
Note 1:
Entertainment Allowance: The least of the following:
- Rs. 5,000
- 20% of basic salary (assuming basic salary is Rs. 5,00,000, then 20% of Rs. 5,00,000 = Rs. 1,00,000)
- Actual entertainment allowance received (Rs. 10,000)
Note 2:
Professional Tax: The least of the following:
- ₹2,500 (or)
- Received amount – ₹2,400
Therefore, the deduction for professional tax is ₹2,400.
Total Deductions:
Standard Deduction: ₹50,000
Entertainment Allowance: ₹5,000
Professional Tax: ₹2,400
Total Deduction Amount: ₹57,400
Taxable Salary:
Gross Salary: ₹8,00,000
Less: Total Deductions: ₹57,400
Net Taxable Salary: ₹7,42,600
Key Points to Remember:
Standard Deduction is applicable to all salaried individuals.
Entertainment Allowance deduction is only for government employees.
Professional Tax deduction is available if it has been paid during the financial year.
These deductions help in reducing the overall taxable salary and thus, the tax liability of an individual. It’s essential for salaried individuals to be aware of these deductions to ensure accurate tax computation and compliance.