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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).

Contents : Salary Income

 Important Links....for calculating Salary Income

(A). Salary -Definition & Meaning
(B). Provident Fund
(C). Allowance
(D). Perquisites
(E). Profit in lieu of Salaly
(F). Retirement Benefits
(G). Deductions
(H). Table Presentation of Salary Income (Section 15 to 17)

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