Section 16 provides a deduction from the income chargeable to tax under the head salaries. It offers deductions for the standard deduction, entertainment allowance, and professional tax.
Section 16 of the Income Tax Act provides tax deductions on salary income to reduce your taxable income. It includes:
Standard Deduction: A flat deduction of ₹50,000 for salaried individuals under the old tax regime. The standard deduction in the new tax regime is ₹75,000 for FY 2024-25.
Entertainment Allowance: Deduction for government employees only, up to a specified limit.
Professional Tax: Deduction on any tax paid to the state on employment.
What is Section 16 of the Income Tax Act?
Section 16 of the Income-tax Act, 1961 allows for deductions from your salary income, which reduces your taxable income and in turn lowers your tax burden.
Section 16 offers three types of deductions:
- Standard Deduction (Section 16(ia)): Employees in India are eligible for a standard deduction. This deduction is either Rs. 50,000 or their total salary, whichever amount is lower. It is a flat deduction that you can deduct from your salary. It is Rs. 50,000 for a financial year, so it does not depend on the number of jobs the employee changes during the year.
- Entertainment Allowance (Section 16(ii)): Entertainment allowance received by an employee is fully taxable and is initially included in the salary. Subsequently, the following deduction is to be made from gross salary:However, deduction in respect of entertainment allowance is available in the case of Government employees only. The amount of deduction will be lower of:(i) 1/5th of his basic salary, or
(ii) Rs. 5,000, or
(iii) Entertainment allowance received.
Note: Deduction in respect of entertainment allowance is only available if a person opts for the old tax regime.
- Professional Tax (Section 16(iii)): Professional tax, a levy by your state government, can be deducted from your taxable income. But there are two key things to remember:
- You can only deduct the tax you actually paid in the previous year, and
- There’s a cap of Rs. 2,500 per person annually.
When the employer reimburses or directly pays the professional tax on behalf of the employee, the amount is initially considered as part of the employee’s salary income. Subsequently, it is permitted as a deduction under Section 16 of the Income Tax Act
Benefits of section 16
- Reduce your taxable income, leading to lower tax liability.
- Simplifies tax filing by eliminating the need to furnish receipts for specific expenses (transport allowance and medical reimbursement) covered by the standard deduction.
Benefits of Section 16 under Old vs New Tax Regime
| Benefit | Old Tax Regime | New Tax Regime |
| Standard Deduction | ₹50,000 deduction for salaried and pensioned taxpayers | ₹75,000 deduction applicable |
| Entertainment Allowance | The deduction is available for government employees only | No deduction allowed |
| Professional Tax | Deduction for actual professional tax paid (up to ₹2,500) | No deduction allowed |
FAQs
Deductions under Section 16 under the New Regime?
Under the new regime, only Section 16(ia) is available, i.e., the standard deduction of Rs.50,000 is available irrespective of the regime opted. However, Section 16(ii), i.e., the entertainment allowance, and Section 16(iii), i.e., the professional tax deduction, are not allowed under the new regime.
Can I claim transport allowance and medical allowance as well, along with the standard deduction?
No, you can claim only the standard deduction of 50,000 and not the transport and medical allowance.