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Section 16 of the Income Tax Act

Highlights

  • Know about all the rules related to Section 16 of the Income Tax Act.
  • Explore the Sub Sections like 16(ii) and 16(ia) under this section.
  • Know about the deduction rule of the entertainment allowance given by the employer to the employee.

It is easy to calculate tax on a computed income but it takes time to compute the annual income of the individual. If you are computing your annual income then there are a lot of deductions and rebates you can claim so that your tax liability might reduce. So, you must know about Section 16 of the Income Tax Act 1961 provides deductions on the taxable income under the Salaries head. This section provides deductions for Standard Deduction, Entertainment Allowance, and Professional Tax. Therefore, a salaried individual can lower his taxable salary with the help of this deduction under Section 16. Let’s explore all the aspects of this deduction in this article to understand it better.

Deductions Under Section 16

There are some sub-sections of this section so you must be aware of all of them. You must understand the rules related to this section.

Standard Deduction Under Section 16(ia)

In the year 2018, this deduction was ₹40000 and the person who is paying the taxes will not have to submit any kind of bill or proof of expenditure. It was a flat deduction of ₹40000 but in the interim budget of 2019, this deduction was increased to ₹50000.

So, from the FY 2019-20 the deduction allowed under section 16 of the income tax act was ₹50000. Therefore, while computing your salary income in the FY 2020-21, you are allowed to claim for the deduction of ₹50000 as per Section 16(ia).

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Even the pensioners can claim for this deduction and the Central Board of Direct Taxes has made this standard deduction applicable to the pensioners. Usually, pension received by the individual from his former employer is taxable under the Salaries head so the deduction of ₹50000 is applicable to them as well under Section 16.

Rule of Deduction Under Section 16

You are allowed to receive the lowest of the following as the Deduction under Section 16:-

  • Salary Received
  • ₹50000

Working of Section 16 Deductions

ParticularsAmount
Salary + DA₹700000
Other Taxable Allowance₹50000
Gross Salary₹750000
Standard Deduction u/s 16₹50000
Total Income₹700000
Other Deductions₹150000
Total Taxable Income₹550000

You must know the Income Tax Slab Rates that will be applicable to your total income at the time of calculating the tax on your total taxable income.

Section 16(ii) Entertainment Allowance

You will have to first include the entertainment allowance into your salary and then it is deducted under Section 16(ii) from your gross salary. So the deduction for the entertainment allowance is only allowed to the Government Employees and not allowed to the non-government employees.

The government employee will get the least of the following amount as a deduction according to Section 16(ii):-

  • 20% of Basic Salary
  • ₹5000
  • Actual Amount for the Allowance Received

For Instance, You can go through the following table:-

Conclusion

Now you can apply deductions under section 16 of the Income Tax Act 1961. The maximum deduction allowed is ₹50000. After computing your income, you can also claim for the tax rebate under Section 87A and it will be a maximum of ₹12500. So, your tax liability will be reduced. If your taxable income is reduced with the deductions then the actual tax amount will also be reduced.

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