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 taxable income under the salary head. Also, this section provides deductions for standard deduction us 16 ia, Entertainment Allowance, and Professional Tax. Therefore, a salaried individual can lower his taxable salary with the help of this deduction under Section 16. So, let’s explore all the aspects of this deduction in this article to understand it better.

Allowances Eligible for Standard Deduction on Salary

With the introduction of the standard deduction under section 16(ia). The relaxation of Conveyance Allowance and Medical Allowance has been increased to ₹50000 which was ₹34,200 earlier. So this article will explain in detail how the income tax deduction works before and after the standard deduction on salary.

Conveyance Allowance or Transport Allowance

Conveyance Allowance also transportation allowance is an additional allowance granted by corporations to their workers to reimburse them for their transportation between their working place and home. This sum may or may not be taxed under the government’s tax regulations.

In practice, a company will provide a transportation allowance unless no transport is supplied by the company. Workers will not get a transportation allowance if their company provides office transportation.

Conveyance Allowance Deduction

Conveyance allowance is excluded up to Rs.19,200 per year or Rs.1,600 per month. Section 10(14)(ii) of the Income Tax Act and Rule 2BB of the Income Tax Rules are the portions that apply to this exemption.

Prior to April 15, 2015, the transportation allowance tax exemption ceiling was Rs.800 per month or Rs.9,600 per year. In Budget 2015, the exemption levels were raised to Rs.1,600 per month or Rs.19,200 per year in order to aid the country’s middle-class taxpayers.

Moreover, you do not need to provide any paperwork or evidence that you are getting a transportation allowance from your company. Under travel or transportation allowance, the whole sum of Rs.1,600 per month can be claimed as a tax deduction.

The exemption limit for blind or orthopedically disabled persons is Rs.3200 per month.

According to Section 10(45) of the Income Tax Act, UPSC members are exempt from paying tax on transportation allowance.

Medical Allowance

Medical Allowance is a set sum of money provided by an employer to employees in the form of their total compensation to cover medical expenses. This allowance is given to workers every month, regardless of whether the worker provides medical invoices to verify the expense. Such fixed compensation, on the other hand, is completely taxed each month under the heading “Additional income.”

Medical Allowance is a set sum of money provided by an employer to employees in the form of their total compensation to cover medical expenses. This allowance is given to workers every month, regardless of whether the worker provides medical invoices to verify the expense. Such fixed compensation, on the other hand, is completely taxed each month under the heading “Additional income.”

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Medical Allowance and Medical Compensation

As previously stated, a medical allowance is a defined amount provided by the company to the employee regardless of whether the individual receives medical care and submits bills to demonstrate the spending or not. Now, medical compensation happens only when the company compensates the worker for the real costs spent. This compensation is available once the worker submits medical expenses, which are then reviewed by the company to make sure that the bills are legitimate. Furthermore, payment of medical expenditures by companies to salaried workers is exempt from taxation.

Applicability for Medical Reimbursement

The following are the qualifying requirements for receiving medical reimbursement from your employer:

  • Medical expenditures paid by the worker or his/her relatives, including wife, kids, sibling, are eligible for reimbursement.
  • Treatment is available at both public and private hospitals/institutions.
  • The medical expense should be provided to the company and should include information on medical expenses incurred to doctors as well as expenses incurred for the acquisition of medications.
  • Also, if the sum of the employee’s medical expenditures exceeds the allowance limit, the company’s reimbursement is taxed as extra income.
  • Please keep in mind that if the employee does not bring the invoices or records with the person, the worker will be unable to obtain compensation.

Deductions Under Section 16

Amounts are deducted from taxable income under section 16 of the Income Tax Act of 1961. In addition to the standard deduction us 16 ia, entertainment allowance, and professional tax deductions. Taxpaying salaried taxpayers can minimize their taxable salary income by using this deduction.

Furthermore, the advantage of this section it expands to a larger sum as a result of recent changes to the standard deduction under section 16(ia). Furthermore, there is no need to provide receipts for travel or medical expenditures, making it simple to file a claim.

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

Standard Deduction Under Section 16(ia)

In the year 2018, this standard deduction under section 16(ia) 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 under section 16 of ₹40000 but in the interim budget of 2019, this standard deduction on salary was increased to ₹50000. So, the standard deduction on salary eliminated the ₹ 15000 medical allowances and ₹ 19200 transport allowance. The Finance Minister, Arun Jaitley, included it in the 2018 budget.

In place of transport allowance and medical refund, the budget for 2018 allowed for a standard deduction on salary of Rs 40,000. Also, this Rs 40,000 deduction us 16 does not necessitate the submission of any bills or evidence of spending by the taxpayer. It allows for a one-time standard deduction under section 16(ia) of Rs 40,000.

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Later in the Budget 2019, the standard deduction under section 16(ia) amount of Rs 40,000 was set at Rs 50,000. As a result, the standard deduction on salary for the financial year 2018-19 was Rs 40,000, while the deduction us 16 for the financial year 2019-20 would be Rs 50,000.

So, from FY 2019-20 the Standard deduction under section 16(ia) 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 standard deduction us 16 ia of ₹50000.

Even the pensioners can claim for this deduction and the Central Board of Direct Taxes has made this standard deduction under section 16(ia) applicable to the pensioners. Usually, pension received by the individual from his former employer is taxable under the Salaries head so the standard deduction under section 16(ia) 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 standard deduction u/s 16(ia)

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

Also, 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.

The Advantage of Standard Deduction on Salary for Working Persons

The standard deduction u/s 16(ia)was established by the government in the 2018 Union Budget to give tax relief to salaried persons. Later that year, in 2019, the ministry of finance increased the ceiling to 50,000.

Prior to 2018, you may claim compensation for transportation expenditures and medical bills incurred on work-related travel. Those deductions, however, were restricted to INR 15,000 per year as a medical allowance and a Transport allowance of INR 1,600 per month (1,600 X 12 = INR 19,200 per year)

As a result, the overall sum you could save from your total income by utilizing these advantages was (15,000 + 19,200) = 34,200.

As a result of the increased standard deduction on salary, the additional tax advantage is (50,000 – 34,200) = 5,800.

Payable Tax Amount Before Standard Deduction on Salary

Salary PortionAmount
Basic pay₹8,00,000
Dearness Allowance₹3,00,000
Contributions towards EPF₹60,000
Deposits in PPF₹120000
Transport allowance₹19,200
Medical allowance₹15,000
Thus, your gross total income₹(8,00,000 + 3,00,000) = ₹11,00,000
Gross total income₹11,00,000 – ₹(60000+ 120,000) = ₹920000
Standard Deductions on salary available₹(19,200 + 15,000) = ₹34,200
Thus, your taxable income₹(920000 – 34,200) = ₹885800
Income Tax SlabTax rates as per new regime
₹0 - ₹2,50,000Nil
₹2,50,001 - ₹ 5,00,0005% of 2,50,0000 = 12500
₹5,00,001 - ₹ 7,50,00010% of total income exceeding ₹5,00,000 = 25000
₹7,50,001 - ₹ 10,00,00015% of total income exceeding ₹7,50,000 = 20370
So, the payable tax amount before standard deduction on salary12500 + 25000 + 20370 = 57870

Payable Tax Amount After Standard Deduction on Salary

Salary PortionAmount
Basic pay₹8,00,000
Dearness Allowance₹3,00,000
Contributions towards EPF₹60,000
Deposits in PPF₹120000
Transport allowance₹19,200
Medical allowance₹15,000
Thus, your total income₹(8,00,000 + 3,00,000) = ₹11,00,000
Gross total income₹11,00,000 – ₹(60000+ 120,000) = ₹920000

Standard deduction under section 16(ia) available on your gross income
₹50,000
Thus, your taxable income₹(920000 – 50,000) = ₹870000
Income Tax SlabTax rates as per new regime
₹0 - ₹2,50,000NIL
₹2,50,001 - ₹ 5,00,0005% of 2,50,0000 = 12500
₹5,00,001 - ₹ 7,50,00010% of total income exceeding ₹5,00,000 = 25000
₹7,50,001 - ₹ 10,00,00015% of total income exceeding ₹7,50,000 = 18000
So, the payable tax amount after standard deduction on salary18000+25000+12500=55500
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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 under section 16 for the entertainment allowance is only allowed to Government Employees and not to non-government employees.

The government employee will get the least of the following amount as a deduction under section 16(ii)

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

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

ParticularsAmount
Basic Salary₹150000
Entertainment Allowance₹500 per month
Entertainment Allowance Deduction
20% of the Basic Salary₹30000
₹5000₹5000
Actual Amount Received as Entertainment Allowance₹500x12= ₹6000
The Least of the Above is Allowed for Deduction₹5000

Professional Tax Under Section 16 (iii)

Section 16iii of the income tax statute allows for a deduction under section 16 for employment taxes. Section 16 allows a taxpayer to deduct the amount paid on account of a tax on employment or professional tax. Moreover, the employment tax is allowed for under Article 276 (2) of the Constitution.

When calculating the exemptions against professional tax, keep the following considerations in mind:

Only in the financial year in which the professional tax is levied and paid to the government may the individual claim the exemption.

The tax paid on behalf of the employee by the company is also deductible. The amount of compensation includes as professional tax will be shown first in the total compensation as a precondition. Later, under section 16, permit the same amount as an exemption.

The deduction under section 16 has no upper or lower limit under the Income Tax Act. Also, the deduction is exclusively determined by the amount of professional tax paid. Any state government, however, cannot collect a professional tax of more than Rs 2500 per year. Only the tax paid is deductible, not the interest or late charge as a result of the delays or non-payment of professional tax.

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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