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Deductions from Gross Salary

Deductions from Gross Salary under Section 16 of the Income-tax Act, 1961

Overview

Section 16 of the Income-tax Act, 1961, provides specific deductions that reduce an individual's gross salary income, thereby lowering their taxable income. These deductions are crucial for salaried individuals as they help in reducing the overall tax burden.

Section 16 offers three types of deductions:

  1. Standard Deduction (Section 16(ia))
  2. Entertainment Allowance (Section 16(ii))
  3. Professional Tax (Section 16(iii))

1. Standard Deduction (Section 16(ia))

The standard deduction is a flat deduction available to all salaried employees. This deduction is straightforward and does not require any proof of expenses.

  • Amount: Rs. 50,000 or the total salary, whichever is lower.
  • Applicability: This deduction is available for every salaried individual, regardless of the number of jobs held during the financial year.
  • New Regime Amendment: The Budget 2023 amendment allows a standard deduction of Rs. 50,000 to be claimed under both the old and new tax regimes.

2. Entertainment Allowance (Section 16(ii))

Entertainment allowance is initially included in the salary and is taxable. However, government employees can claim a deduction under this section.

  • Eligibility: Only government employees can avail of this deduction.
  • Amount of Deduction: The deduction is the lower of the following:
    1. 1/5th of the basic salary
    2. Rs. 5,000
    3. The actual entertainment allowance received
  • Old Regime Only: This deduction is only available if the taxpayer opts for the old tax regime.

3. Professional Tax (Section 16(iii))

Professional tax is a levy imposed by state governments and can be deducted from your taxable income.

  • Deductible Amount: The actual professional tax paid during the previous year.
  • Annual Cap: The maximum deductible amount is Rs. 2,500 per person per year.
  • Employer Contribution: If the employer pays the professional tax on behalf of the employee, it is initially considered as part of the employee's gross salary. However, it is later allowed as a deduction under Section 16(iii).
  • Old Regime Only: This deduction is only available under the old tax regime.

Deductions Under the New Regime

Under the new tax regime, deductions under Section 16 are limited:

  • Available Deduction: Only the standard deduction of Rs. 50,000 (Section 16(ia)) is available.
  • Unavailable Deductions: The deductions for entertainment allowance (Section 16(ii)) and professional tax (Section 16(iii)) are not allowed.

Benefits of Deductions under Section 16

Claiming deductions under Section 16 offers several benefits:

  1. Reduction of Taxable Income: These deductions directly reduce the taxable income, resulting in lower tax liability.
  2. Simplified Tax Filing: The standard deduction simplifies the tax filing process, eliminating the need to furnish receipts for specific expenses like transport allowance and medical reimbursement.
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