Section 16 of Income Tax Act

Section 16 of the Income Tax Act pertains to deductions that an individual can claim from their salary income before arriving at their taxable income.

In simple words, it allows certain expenses and allowances to be deducted from the gross salary, thus reducing the income of an employee subject to tax.

Exemption under Section 16 is designed to offer relief to salaried employees by acknowledging expenses that are deemed necessary for the performance of their duties.

Standard Deduction on Salary Under Section 16(ia)

The standard deduction is a fixed amount that all salaried individuals and pensioners can deduct from their gross salary without the need to provide any proof of expense. This deduction is intended to cover expenses related to employment, such as professional attire, travel expenses and other employment-related expenditures.

With effect from 2023, a maximum amount of ₹50,000 is allowed to every employee as a standard deduction under Section 16(a). Every financial year, a salaried individual can claim the standard deduction of an amount lower than:

• ₹50,000

• Actual Salary Income

The Central Board of Direct Taxes (CBDT) has now clarified that pensioners are eligible for the standard deduction. This is because the pension a taxpayer receives from their former employer is taxed under the category of 'salaries.' As such, pensioners can also avail of the deduction provided under Section 16 of the Income Tax Act.

This amount is reduced from the gross salary income of an employee with other deductions.

The example illustrates it simply:

Assuming an Employee has an Annual Salary including all allowances and perquisites of ₹6,00,000 for Financial Year 2023-2024. Following is the calculation of net taxable salary.

Entertainment Allowance Deduction under Section 16(ii)

This deduction is applicable only to government employees for expenses incurred towards the hospitality of customers. The amount deductible is the least of the following:

actual entertainment allowance received,

20% of basic salary,

₹5,000.

The example below illustrates the entertainment allowance deduction:

Assuming that an employee has ₹8,00,000 as gross salary income for the financial year 2023-2024. He has received an entertainment allowance of ₹20,000 from his employer in the year of service. Let’s see how it will be used to get the net taxable income.

Note: A non-government employee can not avail of this deduction on salary.

Tax on Employment Under Section 16(iii)

The tax paid to the state government on employment, known as tax on employment or professional tax, can also be claimed as a deduction under this Section. The amount paid as professional tax in the year can be fully claimed for deduction.

As per Section 16 (iii) of the Income Tax Act, the deduction for Professional Tax is applicable only in the financial year in which it is paid. According to Section 16 of the Income Tax Act, there is no maximum limit specified for this deduction in terms of amount. However, no state government can impose a Professional Tax exceeding ₹2,500 per annum.

Individuals need to keep a record of the Professional Tax paid during the financial year, as this information will be required when filing the annual Income Tax Return (ITR). The proof of payment can usually be found in the salary slips, Form 16 or a certificate issued by the employer, which outlines the Professional Tax deducted over the course of the year.

Gather Documentation

Before filing your income tax return, collect all necessary documents, such as your salary slips, Form 16 (issued by your employer), and proof of any professional tax paid during the financial year. Mainly, form 16 provided by the employer consists of all this information for the reference of the employee.

Calculate Your Deductions

Based on the documents you have, calculate the total amount that can be claimed under each category of Section 16. For the financial year 2023-2024, the standard deduction is ₹50,000 for salaried employees and pensioners.

File Your Income Tax Return

Login to the e-filing portal of the Income Tax Department. Select the appropriate ITR form based on your income sources. For most salaried individuals, ITR-1 (Sahaj) is applicable.

Enter Your Salary Income Details

In the ITR form, enter your salary income details as per Form 16. Ensure you report the gross salary and then claim deductions under Section 16 appropriately from the options provided below.

Claim Deductions under Section 16

In the relevant fields of the ITR form:

Enter the standard deduction amount.

If applicable, enter the entertainment allowance deduction (for government employees).

Report any professional tax paid during the year.

Review and Submit

After entering all the details, review your return for accuracy. Ensure that the deductions claimed under Section 16 match the calculations you've made based on your documents.

E-Verify Your Return

Once you've submitted your ITR, you will need to verify it. You can e-verify your return using options like Aadhaar OTP, net banking, or by sending a signed copy of ITR-V to the Central Processing Centre (CPC) in Bengaluru within 120 days of filing.

With deduction under Section 16, saving tax through deductions for health insurance is a beneficial provision under Section 80D of the Income Tax Act. This Section allows individuals and Hindu Undivided Families (HUFs) to claim a deduction for the premium paid towards medical insurance plans.

It is available for insurance premiums paid for self, spouse, dependent children, and parents, offering a dual advantage of securing health coverage and reducing taxable income.

With Tata AIG, it is possible to secure a minimum of 5 lakh health insurance coverage, beginning at a minimal cost of merely ₹15 per day. Not only this, but you also get the flexibility to personalise with add-on insurance riders according to your budget and convenience.

Obtaining health insurance is crucial as it safeguards you and your family against financial strain resulting from unforeseen medical emergencies. It motivates people to focus on their health and also offers the advantage of tax benefits sanctioned by the government.