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Key Highlights
- Section 16 of the Income Tax Act deals with tax deductions that can be claimed on your salary.
- There are three types of tax deductions that can occur on your salary.
- These deductions are standard deduction, deduction on entertainment allowance on your salary, and deduction on the professional tax of the salary income.
One of the most important aspects of financial planning is managing your taxes. If you are a salaried individual, having a deeper understanding of the tax deductions on your salary is extremely important.The tax deductions for your salary are mentioned under Section 16 of the Income Tax Act (ITA) . In this blog, we will be going through the details of Section 16 and the specifics of tax deductibles from your salary.
What is Section 16?
Section 16 of the ITA deals with tax deductibles that can be claimed from your salary. There are primarily 3 types of tax deductibles that can be claimed: Standard Deduction The standard deduction is a flat deduction that can be taken from your salary income under Section 16(ia). It was introduced by the government in the 2018 Union Budget and took the place of the medical allowance and transportation deductibles. Initially set at ₹40,000, it was later increased to ₹50,000 in the Interim Budget 2019 to provide greater tax relief. Under Union Budget 2025-26 In the Union Budget 2025-26, the standard deduction has been further increased to ₹75,000 for salaried individuals and pensioners. This deduction is available under the old and new tax regimes, allowing taxpayers to reduce their taxable income accordingly.The standard deduction under Section 16(ia) is also applicable to retired individuals receiving a pension, as pension income is taxed under the head "Income from Salary". Therefore, a standard deduction of ₹75,000 is allowable on pension income every financial year.However, if the total salary or pension income is less than ₹75,000, the allowable standard deduction will be equal to the salary or pension income. Thus, the standard deduction is ₹75,000 or the actual income, whichever is lower. Also Read: New Income Tax Slab for Salaried Individuals FY 2020-21
Deduction on Entertainment Allowance
If your employer provides an entertainment allowance, it is included in your gross salary and added to your taxable income.However, under Section 16(ii), government employees can claim a tax deduction on this allowance. The deduction depends on the nature of employment:
For Central and State Government Employees
The allowed deduction under Section 16(ii) is the lowest of the following:
- ₹10,000 (as revised in Budget 2025-26)
- 20% of the basic salary
- Actual entertainment allowance received
This deduction is applicable only when your salary does not include other allowances, benefits, or perquisites provided by your employer. Additionally, it is based on the entertainment allowance received, not the amount spent on entertainment. For Non-Government Employees If you are not a government employee, no deduction is allowed on the entertainment allowance. Any entertainment allowance provided by your employer is fully taxable and added to your income.
Illustration of Entertainment Allowance Deduction Calculation
- Basic Salary (excluding allowances, benefits, and perquisites): ₹4,00,000
- Entertainment Allowance per month: ₹3,000
- Total Entertainment Allowance for the year: ₹36,000
Amount of Deduction:
- ₹10,000 (as per the revised limit)
- 20% of salary = ₹80,000
- Actual amount received = ₹36,000
The least of the above is ₹10,000. Therefore, the allowable deduction for entertainment allowance is ₹10,000. Example Calculation:
- Basic Salary: ₹4,00,000
- Entertainment Allowance: ₹36,000
Deduction = Least of ₹10,000, 20% of salary (₹80,000), or ₹36,000 → ₹10,000
Deduction Under Professional Tax
Professional tax is deducted from salary income and is part of your tax liability . However, under Section 16(iii) of the Income Tax Act, you can claim a deduction based on the following:
- The deduction applies in the financial year the tax is paid.
- If your employer pays the professional tax, it is considered a perquisite, but you can still claim it as a deduction.
- There is no upper limit on the deduction. Whatever amount is paid as professional tax is fully deductible.
- Penalties or interest on professional tax are not deductible.
Understanding Section 16 of the Income Tax Act is Essential for Tax Management
Understanding Section 16 of the ITA is essential for salaried individuals to optimise their tax management. By claiming the available deductions for the standard deduction, entertainment allowance (if applicable), and professional tax, taxpayers can significantly reduce their taxable income and, consequently, their tax liability.Staying informed about these provisions and utilising them effectively is a key component of sound financial planning . Also Read: 5 Heads of Income Under Income Tax Act
FAQS - FREQUENTLY ASKED QUESTIONS
What is Section 16 of the Income Tax Act about?
Section 16 outlines the allowable deductions from your salary income, which reduces your taxable income.
How many types of deductions are there under Section 16?
There are three main types: standard deduction, entertainment allowance deduction (for government employees), and professional tax deduction.
What is the current standard deduction amount?
The standard deduction is currently ₹75,000 for salaried individuals and pensioners.
Is the standard deduction available under both the old and new tax regimes?
Yes, the standard deduction can be claimed under both tax regimes.
Who can claim a deduction for entertainment allowance?
Only Central and State Government employees are eligible for this deduction.
How is the entertainment allowance deduction calculated?
The deduction is the lowest of: ₹10,000, 20% of the basic salary, or the actual entertainment allowance received.
Can I claim a deduction for professional tax?
Yes, you can deduct the actual amount of professional tax paid during the financial year.
My employer pays my professional tax. Can I still claim a deduction?
Yes, even if your employer pays the professional tax, you can still claim it as a deduction.
Are there any limits on the professional tax deduction?
No, there's no upper limit. You can deduct the full amount of professional tax paid.
Where can I find more information about income tax deductions?
You can consult with a tax advisor or refer to the official Income Tax Department website for detailed information.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
