Deduction from Salary Income (Section 16)

The income chargeable under the head “Salaries” is computed after making the following deductions under Section 16 :

  1. Standard Deduction ;
  2. Entertainment Allowance Deduction ; and
  3. Professional Tax .

1. Standard Deduction [Sec. 16(i)/(ia)] –

  • Standard deduction is Rs. 40,000 ; or
  • the Amount of Salary,whichever is Lower.

2. Entertainment Allowance [Sec. 16(ii)]-

Entertainment allowance is first included in salary income under the head “Salaries” and thereafter a deduction is given on the basis enumerated in the following paragraphs:

(A). In the case of a Government employee (i.e., a Central Government or a State Government employee), the least of the following is Deductible:

  1. Rs. 5,000;
  2. 20 % of Basic Salary; or
  3. Amount of Entertainment Allowance granted during the previous year.

In order to determine amount of entertainment allowance deductible from salary, the following points need consideration:

  1. For this purpose “salary” excludes any allowance, benefit or other perquisites.
  2. Amount actually expended towards entertainment (out of entertainment allowance received) is not taken into consideration.

(B). In the case of a Non-Government Employee (including employees of Statutory Corporation and Local Authority), :

Entertainment Allowance is NOT deductible.

3. Professional Tax or Tax on Employment [Sec. 16(iii)] –

Professional Tax or Tax on Employment, levied by a State under article 276 of the Constitution, is Allowed as Deduction.

The following points should be kept in view —

  1. Deduction is available only in the year in which professional tax is paid.
  2. If the professional tax is paid by the employer on behalf of an employee, it is first included in the salary of the employee as a “perquisite” and then the same amount is allowed as deduction on account of “professional tax” from gross salary.
  3. There is no monetary ceiling under the Income-tax Act. Under article 276 of the Constitution, a State Government cannot impose more than Rs. 2,500 per annum as professional tax. Under the Income-tax Act, whatever professional tax is paid during the previous year, is deductible.

Example :

Suppose X, posted in Hyderabad, is required to pay Rs. 2,000 every year as professional tax. On May 31, 2019, he pays Rs. 4,000 on account of professional tax (i.e., Rs. 2,000 for the year 2018-19 and Rs. 2,000 for the year 2019-20). In this case, Rs. 4,000 is deductible for the previous year 2019-20 (it is incorrect to state that in such a case only Rs. 2,500 is deductible).

4. Relief when Salary is paid in Arrear or in Advance, etc. [Section 89 / Rule 21A]

Where, by reason of any portion of an assessee’s salary being paid in arrears or in advance or by reason of his having received in any one financial year salary for more than twelve months or a payment which under the provisions of section 17(3) is a profit in lieu of salary, his income is assessed at a rate higher than that at which it would otherwise have been assessed, the relief to be granted under section 89 shall be as under:

(A) Where any portion of the Assessee’s Salary is Received in Arrears or in Advance.

Step 1: Calculate the Tax Payable of the Previous Year in which the Arrears/ Advance Salary is Received on:

  1. Total Income inclusive of additional salary.

  2. Total Income exclusive of additional salary.

The difference between (a) and (b) is the tax on additional salary included in the total income.

Step 2: Calculate the Tax Payable of every Previous Year to which the Additional Salary relates :

  1. on total income including additional salary of that particular previous year.

  2. on total income excluding additional salary.

Calculate the difference between (a) and (b) for every previous year to which the additional salary relates and aggregate the same.

Step 3: The Excess between the Tax on Additional Salary as calculated under Step 1 and 2 shall be the Relief Admissible under Section 89.

If there is no excess, no relief is admissible. If the tax calculated in step 1 is less than tax calculated in step 2, the assessee need not apply for relief.

Example :

X is employed by A Ltd. For the previous year 2007-08 his taxable salary income is Rs. 2,30,000 (he has no other income). On Rs. 2,30,000, X has paid income-tax of Rs. 20,600. For the previous year 2018-19, his taxable income (after standard deduction) is Rs. 12,00,000.

Besides, on December 1, 2018, X has received arrears of bonus of Rs. 60,000 pertaining to the previous year 2007-08. This amount was not taxed in the previous year 2007-08, as there was a dispute with the management about calculation of bonus. In this case, Rs. 60,000 will be taxable along with Rs. 12,00,000 for the previous year 2018-19.

X can claim relief under section 89 in respect of arrears of bonus of Rs. 60,000 as follows –

    Previous Year 2007-08 Previous Year 2007-08
(1) (2)

Taxable income without including arrears of bonus

  2,30,000 12,00,000
Tax on above income (including Education Cess) (A) 20,600 1,79,400
Taxable income after including Arrears of Bonus of Rs. 60,000   2,90,000 12,60,000
Tax on above income (including Education Cess) (B) 37,080 1,98,120
Difference between (B) and (A) [ i.e. (B)-(A) ] (C) 16,480 18,720
  • In this case, relief under section 89 will be Rs. 2,240 (i.e., Rs. 18,720 – Rs. 16,480).
  • If (C)(2) is less than (C)(1), relief under section 89 is not available.

(B). Where the Payment is in the nature of Gratuity other than Exempt under Section 10(10) [Rule 21A(3)]:

Relief is available only if the gratuity is received in respect of past services of the assessee extended over a period of not less than 5 years. ( No Relief is Admissible if the period of service is Less than 5 years). The amount of relief is calculated as under:

(a) Where Gratuity is paid in respect of past services of 15 Years or more :

  1. Step 1 : Calculate the tax on total income (including gratuity) in the year of receipt of gratuity and calculate the average rate of tax i.e.

    (Total Tax / Total Income) x 100

  2. Step 2 : Calculate the tax on gratuity on basis of average rate of tax computed in step 1.

  3. Step 3 : Calculate the tax liability by adding 1/3 of the gratuity to the total income of each of the preceding 3 years and calculate the average rate of tax for each year separately.

  4. Step 4 : Calculate the average of the three average rates computed in step 3 above and compute the tax on gratuity at that average rate.

  5. Step 5: The excess, if any, of the tax on gratuity computed at step 2 over step 4 will be the relief admissible under section 89

(b) Where Gratuity is paid in respect of past services of 5 years or more but less than 15 years.

The procedure for computation of relief is same except that in step 3 the number of years for calculating average rate of tax shall be taken as 2 instead of 3 and thus 1/2 of the gratuity will be added in the total income of the preceding 2 years instead of 3 years.

(C) Where the payment is in the nature of Taxable Compensation Received from the Employer or former Employer at or in connection with the Termination of his Employment [Rule 21A(4)]:

Relief will be available only if the following conditions are satisfied:

  1. Compensation is received after continuous services of not less than 3 years.

  2. The unexpired portion of the term of employment is also not less than 3 years.

The procedure for calculating the relief is same as given in Case (a), above, i.e. gratuity paid to the employee in respect of services rendered for a period of 15 years or more.

(D) Where Payment is for Commutation of Pension [Rule 21A(5)]

The procedure for calculating the relief is same as given in case (a) of para (B) i.e. gratuity paid to the employee in respect of services rendered for a period of 15 years or more.

(E) Where the Payment is of a nature other than given under Rule 21A(2) to 21A(5) discussed above [Rule 21A(6)]

In these cases, the CBDT may, having regard to the circumstances of each case, allow such relief as it deems fit.

5. Qualifying Amount (Q.A.) for Deduction u/s 80C

Amount saved and deposited by the employee or assessee in following savings schemes shall qualify for deduction u/s 80C.

  1. Deposits made in Provident Funds
    1. Deposits in Statutory Provident Fund (S.P.F.). Amount deposited by the employee in this fund during the previous year qualifies for deduction.

    2. Deposits in Recognised Provident Fund (R.P.F.). Amount deposited during the previous year fully qualifies for deduction.

    3. Deposits made by the employee in the Unrecognised Provident Fund (U.R.P.F.). Since this fund is not recognised by the Commissioner of Income-Tax, so any amount saved and deposited by the employee in this fund will not qualify for any deduction.

    4. Deposits made in Public Provident Fund. This Provident Fund account can be opened in the name of the employee (assessee), spouse or children and amount deposited by the assessee during the previous year in any of these accounts shall qualify up to a maximum of 1,00,000.

Repayment of any loan taken will not qualify for the deduction.

2. Payment of Life Insurance Premium.

Actual amount of premium deposited by the- employee or on his behalf by his employer or 20% of capital sum assured w.e. is less shall qualify for deduction. Life insurance policies can be obtained in the name of the assessee, spouse and children and in case of HUF in the name of any or all the co-parceners of the 
HUF.

The children means all the sons and daughters of the assessee whether minor or major, whether dependent upon assessee or are independent or may be married or unmarried. It also includes step or adopted children.

Capital sum assured shall not include bonus or any premium assured to be returned.

Any premium or other payment made on an insurance policy other than a contract for deferred annuity issued on or after 1-4-2012 shall be eligible for deduction upto 10% of actual capital sum assured

Note :  For persons suffering from disability (as referred to in Section 80U) or disease (as specified in the rules made u/s 8ODDB, the deduction u/s 80C shall be available if the premium for the policy does not exceed 15% of capital sum assured for policies issued on or after 1-4-2013.

(3)       Amount deducted out of Govt. employee’s salary towards deferred annuity. In case any amount has been deducted out of salary of Government employee for securing a deferred annuity for him or making a provision for his spouse or children. The amount so deducted but not exceeding 20% of his salary will qualify for this deduction.

(4)       Payment made towards Group Insurance. Any amount deducted and deposited by employer towards employee’s group insurance shall fully qualify for deduction.

(5)       Deposits made in approved Superannuation Fund. Amount deposited during the previous year shall fully qualify for deduction.

(6)       Payment for a deferred annuity. Any payment made to effect or to keep in force a contract for deferred annuity fully qualifies for deduction u/s 80C.

(7)       Deposits made in Unit Linked Insurance Plan (ULIP). Any amount deposited by the assessee in Unit Linked Insurance Plan of UTI or LIC mutual fund shall fully qualify for deduction. Amount can be deposited in the name of assessee, spouse and children.

(8) Amount invested in National Savings Certificates—VIlI Issue or IX issue. Amount invested in National Savings Certificates—VIII issue or IX issue full qualifies for deduction u/s 80C. Interest accrued on these certificates purchased earlier is deemed to be re-invested. hence such interest also fully qualifies for deduction every year.

(9) Amount invested in National Saving Scheme (NSS) 1992. Any amount invested in NSS1992 fully qualifies for deduction.

(10) Amount paid to LIC under Jeevan Dhara, Jeevan Akshay Policies. Any amount paid to LIC under Jeevan Dhara, New Jeevan Dhara I or New Jeevan Akshay, New Jeevan Akshay I, New Jeevan Akshay II plans fully qualify for this deduction. Investment in these plans can be made in name of assessee and in case of HUF, in the name of any of its members.

(11) Amount invested in notified Pension Funds set up by Mutual Funds or UTL Any amount invested by an individual in notified funds set up by Mutual Funds or UTI shall qualify for deduction u/s 80C.

(12) Amount deposited with National Housing Bank. Any amount deposited as subscription to Home Loan Account Scheme of the National Housing Bank or contribution to any notified pension fund set up by the National Housing Bank will qualify for deduction u/s 80C.

(13) Amount deposited with an authority engaged in Housing Development or Town or Rural Development. There are approved authorities which are engaged in the field of

Housing, Town, Cities and Rural development and any amount deposited with these authorities shall fully qualify for deduction u/s 80C.

Under this following subsciprions will qualify—Any sum paid as subscription to any scheme of

  1. a public sector company engaged in providing long term finance for purchase, or construction of residential houses in India.
  2. any authority like housing board constituted in India for the purposes of planning, development or improvement of cities/towns and villages.

(14) Any subscription in deposit scheme of Central Govt. Any subscription to any such security of the Central Government or any such deposit schemes as Central Government may notify in Official Gazettee, specify in this behalf will qualify for deduction u/s 80C.

(15) Term Deposits with Banks. Term deposits with certain scheduled banks of not less than 5 years duration as per scheme framed by Central Government shall also qualify for deduction u/s 80C.

(16) Amount deposited or invested in Equity Linked Saving Scheme (ELSS). Amount invested in Equity linked Savings Scheme fully qualify for this deduction.

(17) Repayment of house building loan. Any amount repaid under house building loan taken from Govt., LIC, Bank, HDFC, HUDCO or other housing finance institutions or employer [Not from friends or relatives]

OR

Amount repaid as full price or installment of price of a house purchased from Govt. or an approved agency up to actual amount repaid shall fully qualify for deduction u/s 80C.

The amount repaid must not include interest on loan or ground rent but shall include stamp duty and registration charges.

(18) Payment of Tuition fees. Any amount paid as tuition fees (excluding any payment towards any development fees or donation or payment of similar nature whether) at the time of admission or thereafter to

(a) any school, college or university or other educational institution situated in India,

(b) for the purpose of full time education of any two children of the individual.

The amount, which shall qualify under this section, shall not exceed actual amount paid as tuition fee for two children only.

(19) Amount paid as subscription to equity shares or debentures. Amount paid as subscription to equity shares or debentures of a public company or a public financial institution forming part of eligible issue of capital. In case such issue is notified by CBDT, the amount invested shall qualify for deduction u/s 80C. The amount so invested in on which deduction is claimed shall not qualify for exemption of capital gain uls 54EA or u/s 54EB or u/s 54EC.

(20) Amount paid as subscription to units of a mutual fund. Amount paid as subscription to any units of any mutual fund. In case such unit scheme of mutual funds is notified by CBDT, the amount so invested shall qualify for deduction u/s 80C. The amount so invested in on which deduction is claimed shall not qualify for exemption of capital gain u/s 54EA or u/s 54EB or u/s 54EC.

The shares, debentures or units acquired under (19) and (20) above cannot be converted into money for three years. In case such units or shares are converted into money before the expiry of three years the amount of rebate claimed shall become as tax payable of the year in which these are sold or otherwise transferred.

(21) Investment in Notified bonds issued by NABARD. Investment made by the assessee in notified bonds issued by National Bank for Agriculture and Rural Development will qualify for deduction. [u/s 80C]

(22) Deposit in Post Office Time Deposit and Senior Citizens Savings Scheme

1. Five year time deposit in an account under Post Office Time Deposit Rules 1981.

2. Deposit in an account under the Senior Citizens Savings Scheme Rules 2004.

These deposits are for 5 years and if withdrawn before the expiry of the period of years,

the amount so withdrawn shall be deemed to be income of the assessee of the year in which withdrawn. Not taxable if withdrawn by legal heirers.

Other Points :

  • Deduction u/s 80C shall be allowed even if investment is made in these savings scheme out of assessee’s savings of past previous year or out of any other income which is otherwise exempt under Income-Tax Act.

  • Deduction u/s 80C shall be allowed Out of assessees Gross Total Income. This deduction is not allowed out of assessee’ s income of Long Term Capital Gain and income from gambling etc.

  • Deduction u/s 80C shall be allowed only if amount has been actually deposited or paid in these savings schemes up to 31st March. So any amount due but not paid up to 31st March shall not qualify for this deduction.