Section 16 of the Income Tax Act: Deduction from Salary

The Income Tax Act of 1961 contains many provisions that taxpayers can use to reduce their taxable income and, consequently, their tax liability. Among the many provisions of the Income Tax Act is section 16, which provides taxpayers with as many as three deductions. Continue reading to learn all about the deductions u/s 16 of the Income Tax Act, how you can use them to reduce your total taxable income, and their applicability under the new income tax regime. 

What Is Section 16 of the Income Tax Act? 

Section 16 of the Income Tax Act contains provisions that enable salaried individuals to claim specific deductions from their salary income. These deductions are subtracted from the gross salary that the individuals earned during a financial year to arrive at the net taxable salary. The primary objective of introducing this section is to provide some tax relief to salaried employees by reducing their total taxable income.  

It is important to note that the various deductions under section 16 can only be claimed against salary income and not against any other head of income, such as income from house property, profits and gains from business or profession, income from capital gains, or income from other sources.  

What are the Different Deductions Available Under Section 16 of the Income Tax Act?

The specific deductions that this particular section of the act deals with include standard deduction, entertainment allowance, and professional tax. Here is a more detailed overview of each of these three deductions and the maximum limit that can be deducted from the total income.    

1. Standard Deduction 

First introduced in the Union Budget 2018, the standard deduction is a flat amount that can be deducted from an individual’s gross salary. Since its introduction, it has been revised multiple times to increase the maximum claim limit. One of the highlights of the standard deduction is that it is available for both individuals with salary income as well as for pensioners.   

For the financial year 2024-2025, the amount of standard deduction available for salaried employees and pensioners is ₹75,000. This deduction is automatically applied when you fill out your Income Tax Return (ITR). 

Know More About How to File TDS Return?           

Note: The standard deduction under section 16 of the Income Tax Act is subject to revision from time to time. Therefore, it is important to keep an eye on the tax developments that are announced during the Union budget session every year to stay updated.        

2. Entertainment Allowance

The entertainment allowance is one of the many allowances that are offered to government employees as part of their salary. As per the provisions of section 16 of the Income Tax Act, government employees getting entertainment allowance can deduct it from their total income to reduce their tax liability. 

The maximum amount of entertainment allowance that can be claimed as per section 16 is limited to the lower of the following: 

• The amount received as entertainment allowance during the financial year 
• 1/5th of the basic salary for the financial year
• ₹5,000 

Now, it is important to note that the entertainment allowance deduction under section 16 is only available to government employees. Employees from private sector organisations are not eligible to claim this particular deduction.   

3. Professional Tax

The professional tax is a tax that is levied by the government of the state in which the taxpayer works. The rate of professional tax varies from one state to another. Section 16 of the Income Tax Act allows salaried individuals employed in government and private sector organisations to deduct the professional tax they pay during a financial year from their total taxable income. 

As per section 16, the maximum amount that salaried individuals can claim during a financial year is limited to the professional tax they paid during the year or ₹2,500, whichever is lower.  

As you can see, with these three deductions, individuals with salary income can effectively reduce their taxable income and their overall tax liability.   

Applicability of Section 16 of the Income Tax Act in the New Income Tax Regime

The Union Budget 2020 introduced a new income tax regime that offers lower rates but foregoes most deductions and exemptions. Here is a quick overview of the applicability of the deductions under Section 16 of the Income Tax Act in the new tax regime. 

• Standard Deduction: Available for individuals in the new income tax regime
• Entertainment Allowance: Not available for individuals opting for the new tax regime
• Professional Tax: Not available for individuals opting for the new tax regime

Conclusion

Section 16 of the Income Tax Act contains useful deductions that salaried individuals and pensioners can use to reduce their tax liability. However, it is important to note that except for the standard deduction, the other two deductions under section 16, namely, entertainment allowance and professional tax, are not available for those who opt for the new income tax regime.

Therefore, if you plan to make use of all of the deductions u/s 16 of the Income Tax Act, consider opting for the old income tax regime when filing your income tax return. That being said, the decision between the old and new regimes must be made only after carefully considering your financial situation, salary structure, and the deductions and exemptions you are eligible for. This way, you can ensure effective tax planning. 

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