How to Calculate Deductions under Section 16 with Examples

The income tax regime is balanced with numerous provisions that impose taxes as well as offer deductions and rebates. The different slab divisions and classified strategies for all the taxpayers come with relaxation. One such provision is Section 16 of the Income Tax Act, 1961. According to this provision, a salaried taxpayer is entitled to receive deductions on his income chargeable to tax under the specified head “salaries”. There are three types of deduction under Section 16 that benefit all salaried individuals. Let us learn more about this provision and understand how to calculate the deductions as well.

Calculation of Different Types of Deductions u/s Section 16

For calculating the deductions, it is essential to understand the provisions and quantify all the expenses that fall under these categories. To avoid complications or any last-minute trouble, one can take the help of professional accountants and tax consultants. Click to get detailed information.

Section 16 (i)/(ia): Standard Deductions

The standard deduction under Section 16 is a flat sum of INR 50,000 on the net taxable income of a salaried individual. This provision was introduced in 2018 by former Finance Minister Arun Jaitley. It replaced the formed deductions under transport allowance (19,200) and medical reimbursement (15,000). The advantage of this section is that taxpayers do not have to produce any bills or documents to claim this deduction.

Calculate Deductions income tax

Calculating Standard Deduction With Example

  • Suppose a person earns INR 8,00,000 annually, including the dearness allowance.
  • Add the other taxable allowances to this amount, say, INR 1,00,000. His total income stands at 9 lakhs per annum.
  • The standard deductions of INR 50,000 will apply to this amount making his total taxable income 8,50,000.

Section 16 (ii): Entertainment Allowance

To claim this deduction, a taxpayer must receive an allowance under the “entertainment allowance” column from his employer. This amount is deducted from the taxable income of the salaried individuals.

Calculating Standard Deduction With Example

  • For corporate and private employees, this allowance is not available in any sector.
  • For central and state government employees, the deduction under Section 16 is the least of three categories: 20% of salary, INR 5,000, or the amount granted for this category in a financial year.
  • So, if a person gets 12,000 as an entertainment allowance and earns 2,40,000 annually, 20% of his basic salary will be 48,000. In this case, his deduction will amount to INR 5,000, which is the least amount of the three categories.

Section (iii): Employment or Professional Tax

Under this section, the amount a taxpayer pays as employment or professional tax is eligible for deduction. This amount is the exact sum one pays as professional tax.

Calculating Standard Deduction With Example

  • To calculate this deduction under Section 16, a taxpayer just needs to keep the given information in mind.
  • One must claim this deduction the same year that he pays the tax.
  • Also, if any salaried individual’s employer pays this tax on his behalf, he will not be eligible for the deduction.
  • In this case, there is no lower or upper limit on the amount. The deduction is equivalent to the professional tax amount, but a state government cannot charge this tax more than 2,500.

Deduction under Section 16 is one of the most important provisions given the enormous number of salaried individuals in India. Any taxpayer who does not know much about these rules should take professional assistance. It is better to pay something to save more rather than miss out on these deductions. Pay the justified amount of tax on time!

Post Author: Jennifer Slegg