Salaried class is the backbone of Indian Tax Regime. Unlike, businesses salaried person do not have access to costly tax consultants. They do not have complex tools for tax savings. Most of them get their salary after tax deduction under section 192 of the Income Tax Act, 1962.
Deductions under section 16 is a way to reduce excess burden on salaried class. To understand it, let’s decode this section. But first let’s understand the concept of deduction.
What is Deduction?
Deduction is a way to give relief to tax payer. It is the amount a taxpayer reduces from his/her total income in computing the tax liability.
Often some confuse the deductions with exemption. While exemption is never added to income, deductions do get added to the total income liable to tax. Let’s understand it with an example,
Suppose Mr. A has income from salary of ₹ 10,00,000. His income from agriculture is ₹ 6,00,000.
Here, total income for computing tax liability of Mr. A will be ₹ 10,00,000 only. Agriculture income of ₹ 6,00,000 will be exempt under section 10(1).
His tax computation will look like –
|Total Income (₹ 10,00,000 + ₹ 6,00,000)||16,00,000|
|Less: Exemption u/s 10(1) – Income from agriculture||(6,00,000)|
|Total Taxable Income (A)||₹ 10,00,000|
|Less: Deductions u/s 16(ia) – Standard deduction on salary||(50,000)|
|Other deductions under chapter VI||(Deductions under Chapter VI discussed separately)|
|Total tax (B)||Net tax after accounting Basic Exemption Limits as per applicable slab rates|
Notice above, how exempt income didn’t form part of total taxable Income. But, deduction was included in total taxable Income and was reduced as deduction. Exemption is for all taxpayer. But deduction is claimed by particular type of assessees only. Also, deduction is subject to fulfilment of certain conditions as specified in the relevant sections of Income-tax Act.
Now that you know the concept of deduction, let’s understand the type of deductions offered by section 16.
What Deductions are offered by section 16?
It offers three types of deductions –
- Standard deduction of ₹ 50,000 or salary, whichever is less [ applicable from AY 2020-21 – Act No. 7 of 2019, w.e.f. 1-4-2020. ]
- Entertainment Allowance for Government Employees only up to 1/5th of their salary or ₹ 5,000 whichever is less
- Tax on Employment paid is allowed as deduction for Employment under clause (2) of Article 276 of the Indian Constitution. (Professional Tax levied by Municipalities, Local Government Bodies)
Let’s understand it with the earlier example,
- Mr. A had income of ₹ 10,00,000 from salary which is more than ₹ 50,000. Thus, he will get standard deduction of ₹ 50,000 u/s 16(ia).
- If he is government employee receiving entertainment allowances, he will get further deduction. It is limited to 1/5th of his salary or ₹ 5,000, whichever is less. In this case, ₹ 5,000 extra as deduction u/s 16(ii).
- If he pays professional tax to municipality or concerned local body, he can claim the same as deduction u/s 16(iii).
Do taxpayer need to fulfil any condition for claiming standard deduction u/s 16(ia)?
No, this is standard deduction offered without any condition.
Can pensioners claim this standard deduction?
Yes, Pension income is calculated under the head “Salaries”. Hence, Pensioners can claim the standard deduction of ₹ 50,000. This is huge relief to senior citizens who depend on pension income.