Deductions from Salaries under the Income Tax Act / Deduction
Under Section 16 of Income Tax Act / Section 16(ia), Section 16(ii), Section
16(iii) Section 24(b)
Taxation on salary income
is one of the most significant areas of direct taxation in India, as a large
number of taxpayers fall under the salaried class. Salaried employees have
limited flexibility in planning their tax liability compared to businesspersons
or professionals, since their income is fixed and deductions available are
limited to what is specifically provided under the law.
To provide relief to
salaried taxpayers and to account for expenses that are generally incurred by
them in the course of employment, the Income Tax Act, 1961 allows
certain deductions from salary income. These deductions are crucial as they
reduce the taxable income, thereby lowering the tax burden. They are not
optional exemptions but statutory benefits available under specified sections.
The deductions under the
head “Salaries” are primarily governed by Section 16 and Section 24(b)
of the Income Tax Act. These include:
1. Standard
Deduction [Section 16(ia)] – a flat deduction available to all
salaried employees and pensioners.
2. Entertainment
Allowance [Section 16(ii)] – available only to Government
employees.
3. Professional
Tax / Tax on Employment [Section 16(iii)] – deduction for
tax levied by State Governments on salaried individuals.
4. Interest
on Borrowed Capital [Section 24(b)] – deduction of interest
on housing loans for acquisition, construction, or repair of house property.
Understanding these
provisions is important not only for accurate tax computation but also for
effective tax planning by employees. Let us now examine each of these
deductions in detail.
1. Standard
Deduction on Salary Income [Section 16(ia)]
The standard deduction
was reintroduced to simplify tax computation for
salaried taxpayers. It is a flat deduction available irrespective of
actual expenses incurred by the employee. Earlier, specific allowances such as
transportation allowance and medical reimbursement were exempt; however, they
were replaced with this single consolidated deduction.
Quantum of Deduction
- New Regime (Section 115BAC):
- From AY 2025-26: ₹75,000 or salary,
whichever is lower.
- Up to AY 2024-25: ₹50,000 or salary,
whichever is lower.
- Old Regime:
- From AY 2020-21 onwards: ₹50,000 or
salary, whichever is lower.
- AY 2019-20: ₹40,000 or salary,
whichever is lower.
- AY 2006-07 to 2018-19: No deduction
available.
This deduction is
automatically available to all salaried employees and pensioners, offering
substantial relief by reducing taxable salary.
2.
Entertainment Allowance [Section 16(ii)]
Entertainment allowance
is an amount given by employers to meet expenses incurred on official
hospitality. Although it is part of the salary, a specific deduction is
available for Government employees only.
Deduction Rules
The deduction is
restricted to the least of:
1. Actual
entertainment allowance received,
2. 20%
of the basic salary, or
3. ₹5,000.
Conditions
- Available only to Central and State
Government employees.
- Non-government employees are not
eligible (since AY 2002-03).
- Deduction is allowed after first
including the allowance in taxable salary.
Illustration
Suppose a Central
Government employee has a basic salary of ₹50,000 per month and receives ₹2,000
per month as entertainment allowance:
- Actual allowance = ₹24,000 (₹2,000 ×
12)
- 20% of salary = ₹1,20,000
- Fixed limit = ₹5,000
Thus, deduction allowable
= ₹5,000 (least of the three).
3. Tax on
Employment / Professional Tax [Section 16(iii)]
Professional tax, also
called Tax on Employment, is a State-level tax imposed under Article
276(2) of the Constitution of India. It is deducted by the employer and
paid to the State Government on behalf of the employee.
Key Points
- Deduction available from AY 1990-91.
- Allowed only in the year in which the
tax is actually paid.
- If employer pays the professional
tax, it is first treated as a perquisite (included in salary) and then
allowed as a deduction.
Thus, professional tax
directly reduces the taxable income of an employee to the extent of the tax
actually paid to the State Government.
4. Interest
on Borrowed Capital [Section 24(b)]
One of the most valuable
deductions for salaried taxpayers is the deduction of interest on home loans.
This provision helps individuals claim relief on the interest paid towards
loans taken for acquiring, constructing, repairing, or reconstructing a house
property.
Conditions
1. For
acquisition/construction, the property must be completed within 5 years
from the end of the financial year of borrowing.
2. Certificate
of interest from the lender must be furnished.
3. Deduction
is available only if the property is owned and used by the employee for
self-residence (though in some cases notional benefit is given for
non-occupation due to employment in another city).
Maximum Deduction
- Repair/renewal/reconstruction:
₹30,000
- Acquisition/Construction before
01.04.1999: ₹30,000
- Acquisition/Construction on or after
01.04.1999:
- Up to AY 2014-15: ₹1,50,000
- From AY 2015-16 onwards: ₹2,00,000
Further, from FY 2019-20,
total deduction cannot exceed ₹2,00,000.
Other Important Points
- Deduction is allowed on an accrual
basis, even if interest is unpaid.
- Interest on unpaid interest is not
deductible.
- Interest on a fresh loan taken to
repay an original housing loan is also deductible.
Pre-Construction Period
Interest
Interest paid during the
period before completion of construction (pre-construction period) is allowed
as deduction in five equal installments starting from the year of
completion.
Conclusion
The Income Tax Act, 1961,
recognizes that salaried taxpayers bear routine financial commitments and
limited opportunities for tax planning. To provide relief, it offers specific
deductions from salary income, namely:
- Standard Deduction:
Flat benefit to all salaried individuals and pensioners.
- Entertainment Allowance:
Deduction exclusively for Government employees.
- Professional Tax:
Deduction for employment tax paid to State Governments.
- Interest on Housing Loan:
Major deduction for those with home loans, encouraging home ownership.
By understanding and
utilizing these provisions effectively, salaried individuals can significantly
reduce their taxable income and ensure compliance with the law while enjoying
legitimate tax savings.
Disclaimer: All the Information is based on the notification, circular advisory and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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