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Deduction-under-section-16-of-the-Income-Tax-Act

 

Deduction under section 16 of the Income Tax Act

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Introduction-

Deduction under section 16 i.e. Standard deductions, Entertainment allowance & Professional Tax / Tax on employment of the Income Tax Act are allowed as under-

 
Standard deduction of Rs. 40,000 has introduced in budget 2018 applicable w.e.f. 01.04.2018 In Budget 2019, has increased the limit to Rs. 50,000 for the F.Y. 2019-20, as compared to previous F.Y. 2018-19 it was Rs. 40,000 to all employees against their income taxable under the head of income from salary (including pensions) but disallowed the following deductions i.e.in budget 2018-

Transport allowance of Rs. 19,200 per annum.

Medical Reimbursement of Rs. 15,000 per annum.

 
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Example 1-
Mr. Ram is an employee, has the following details of salary for the year are as under-

Particulars

Amount (Rs.)

Basic Salary

3,00,000

Dearness Allowance

1,20,000

Deposited in PPF

30,000

Contribution to PF

36,000

What will be the amount of standard deduction under section 16 (ia) for the F.Y. 2018-19 & 2019-20 ?

 

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Answer-

Particulars

Amount (Rs.)

F.Y. 2019-20 (Amount Rs.)

F.Y. 2018-19 (Amount Rs.)

Basic Salary

 

3,00,000

3,00,000

Dearness Allowance

 

1,20,000

1,20,000

Total Income

 

4,20,000

4,20,000

Less: Deduction under section 80C

 

 

 

Deposited in PPF

30,000

 

 

Contribution to PF

36,000

66,000

66,000

Gross Total Income

 

3,54,000

3,54,000

Less: Standard Deduction

 

50,000*

40,000

Net Taxable Income

 

3,04,000

3,14,000

* Now the Standard Deduction for salaried persons has increased to Rs. 50,000 for the F.Y. 2019-20, previous year i.e. F.Y. 2018-19 it was of Rs 40,000

 

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2. Entertainment Allowance [Section 16(ii)]-

A deduction is also allowed under section 16(ii) in respect of any allowance in the nature of an entertainment   allowance specifically   granted by an employer to the assessee, who is in receipt of a salary from the Government. No deduction on account of entertainment allowance is available to non-government employees.

The Deduction is allowed the least of the following-

  • Actual Amount received
  • 20% of Basic Salary (exclusive of  any  allowance, benefit  or   other perquisite) or
  • 5,000
 
Example 2-
Mr. Ram is a Government employee, has the following details of salary for the year 2018-19 are as under-

Particulars

Amount (Rs.)

Basic Salary

3,00,000

Dearness Allowance

1,20,000

Entertainment Allowance

60,000

What will be the amount of deduction under section 16 (ii)?

 

Answer-

Particulars

Amount (Rs.)

Basic Salary

3,00,000

Dearness Allowance

1,20,000

Entertainment Allowance

60,000

Total Income

4,80,000

Less: Deduction under section 16(ii)*

5,000

Income from Salary

4,75,000

* Deduction under section 16(ii) is allowed least of the following-

  • 60,000 (Actual Amount Received)
  • 20% of Rs. 3,00,000 (Basic Salary) i.e. 60,000
  • 5,000

So, Mr. Ram is eligible for deduction under section 16(ii) is Rs. 5,000

 

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Professional tax levied under section 276(2) of Indian Constitution. The professionals earning an income from salary or other practices such as a lawyer, teacher, doctor, chartered accountant, etc. are required to pay professional tax.

The maximum amount of Professional Tax is restricted to ₹ 2,500. The amount paid as Professional Tax is allowed as a deduction under section 16 (iii) of the Income Tax Act, 1961 and the income tax on the balance amount shall be calculated as per the tax slab.

 

Example 3-

Mr. Ram has Salary of Rs. 3, 00,000 and pay professional tax of Rs. 1,500 during the year. What is the treatment of professional tax?

 

Answer-

Particulars

Amount (Rs.)

Income from Salary-

Salary Income

3,00,000

Less: Deductions-

 

Professional tax paid

1,500

Income from Salary

2,98,500**

**Note- Rs. 2, 98,500 is taxable as Income from salary under Income Tax

 



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