Income Tax Section 16 of the Income Tax Act 1961 provides for a deduction from taxable income under the wage line. Provides deductions for the standard deduction, entertainment allowance, and labour tax. With this deduction, the taxpayer can reduce the taxable wage income that is subject to tax.
Also, with the recent changes to the flat-rate deduction, the benefit under this section extends to a larger amount. Plus, there’s no problem providing travel and medical expenses, which makes it pretty straightforward.
In this article, we will look at each of the deductions in Section 16 along with the illustrations of the calculation.
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Standard pay deduction under section 16 (ia)
In other words, A standard deduction is allowed under section 16ia of the Income Tax Act. The standard deduction replaced the transportation allowance of Rs 19,200 and the medical reimbursement of Rs 15,000. The 2018 budget, was introduced by our finance minister, Jaitley.
However, The 2018 budget includes a standard deduction of Rs 40,000 in lieu of travel and medical expenses. This deduction of Rs 40,000 does not require the taxpayer to submit invoices or proof of expense. It provides for a fixed deduction of Rs 40,000.
Subsequently, in the provisional budget for 2019, the deduction was increased from Rs 40,000 to Rs 50,000. Therefore, the deduction for the 2018-2019 financial year was Rs 40,000 and from the 2019-20 financial year, the deduction will be Rs 50,000.
The ordinary deduction is also available for retirees. The CDTC has issued a clarification clarifying the applicability of the standard deduction to retirees. The pension received by the taxpayer from his former employer will be taxed under “salary”. Since the pension received is taxed in the payroll section, the deduction will also be available to retirees under section 16.
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In addition, The maximum deduction will be available U/s 16 for the standard deduction is:
Whatever it is below
Remember that the standard deduction has nothing to do with u / s 80C deduction or any other section of the EIA chapter.
After that, an Illustration for the calculation of the standard deduction
Entertainment allowance under Section 16 (ii)
Entertainment allowance is first included in wage income and then deducted according to various criteria. The allowance must be an allowance specifically granted by the employer to the taxpayer as an entertainment allowance.
Entertainment allowance for government employees
For central and state government employees, the available deduction is the lower of the following:
20% of the basic salary
Amount provided as an entertainment allowance in the fiscal year
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To determine the amount of the allowance, the taxpayer must ensure that the following conditions are met:
The salary must not include any other allowances, employer benefits, or privileges received. Basically, the salary should be the gross amount received with no other benefits.
Never include the actual amount spent in the entertainment allowance received by the employer.
Entertainment allowance for a non-state employee
The entertainment allowance deduction is not available for non-state employees. Only central or state government employees are eligible for the deduction. Furthermore, employees of local and public bodies are not entitled to the deduction.
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Employee tax under Section 16 (iii)
An employee’s tax deduction is allowed under section 16iii of the Income Tax Act. The amount paid by the taxpayer for the labour tax or the professional tax is allowed as a deduction pursuant to article 16. Here, the labour tax is provided for by section 276, paragraph 2, of the Constitution.
When calculating professional tax deductions, the following points should be taken into account:
The taxpayer must request the deduction only in the fiscal year in which the professional tax is actually paid to the State.
Tax paid by the employer on behalf of an employee is also deductible. In this case, the amount paid by the employer as labour tax will first be included as a mandatory condition in the total salary. Thereafter, an equal amount will be allowed as a deduction under section 16.
Under Section 16 of the Income Tax Act, there is no upper or lower deduction limit. The deduction depends exclusively on the actual amount of the business tax. However, the government of any state cannot charge more than 2,500 rupees per year as a business tax. Only tax paid is deductible, not interest or penalties for late or non-payment of labour tax.
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