Standard Deduction Under Section 16 IA

Introduction

The Indian government has created numerous sections within the Income Tax Act of 1961 to define the taxability for all legal entities, such as individuals and businesses. As it is compulsory to comply with all the tax laws and pay tax on time, it is necessary to understand all the sections of the Income Tax Act that details the tax applicability under the five heads of income tax. 

Within this Act, learning about Section 16 and the standard deduction under Section 16 ia is vital if you are a salaried employee. 
 

What is Section 16 of the Income Tax Act?

Section 16 of the Income Tax Act of 1961 contains provisions related to the salary income of an individual. It outlines the different components of salary that are taxable and exempt from tax. According to Section 16, the following elements of salary income are taxable.

1.    Basic salary 
2.    Dearness allowance (DA) 
3.    House rent allowance (HRA) 
4.    Bonus and commission 
5.    Fees, allowances, and perquisites, such as travel allowance, medical allowance, and entertainment allowance 
6.    Employer's contribution to provident fund (PF) and Voluntary Provident Fund (VPF)
7.    Gratuity received by government employees 
8.    Leave encashment received at the time of retirement 
9.    Retrenchment compensation 
10.    Any other payment received by the employee as a result of their employment

The section also provides for certain exemptions and deductions from the taxable salary income, such as: 

1.    Standard deduction of Rs. 50,000 for salaried individuals 
2.    Leave travel concession (LTC) 
3.    Payment of tax on behalf of the employee by the employer 
4.    Commuted pension received by government employees
 

Standard Deduction Under Section 16

Section 16 of the Income Tax Act includes standard deduction under 16 ia, which allows salaried employees to lower their taxable income. The standard deduction under 16 ia, was introduced by the Indian Finance Minister in budget 2018. The standard deduction under 16 ia replaced the medical allowance of Rs 15,000 and the transport allowance of Rs 19,200 per annum. Until 2019, the standard deduction under 16 ia was Rs 40,000 until it was increased to Rs 50,000 in the 2019 budget. 

Now, the standard deduction under 16 ia means a tax deduction of Rs 50,000 in place of the medical and transport allowance. The standard deduction does not require the taxpayer utilizing the deduction to submit any documents for proving an expenditure of Rs 40,000 but provides a flat standard deduction from the taxable income. 

The standard deduction is available to all salaried individuals, including pensioners, and is applicable irrespective of the actual amount of salary received. However, the standard deduction cannot exceed the individual’s salary amount during the year. Furthermore, the taxpayers can not claim the standard deduction in addition to any other deduction available under Section 16, such as HRA or conveyance allowance.
 

Illustration on Calculation of Standard deduction

Here is an illustration to better understand what is standard deduction under section 16 ia.

What are the benefits of standard deduction on tax for salaried individuals?

Before the standard deduction, taxpayers could claim medical and transport allowances. However, in 2018, a standard deduction of Rs 40,000 was introduced, which was later increased to Rs 50,000 in 2019. 

Before 2018, taxpayers could have claimed reimbursement for medical bills and transportation expenses, but it was limited to: 

●    Medical allowance with a maximum cap of Rs 15,000
●    Rs 1,600 per month (Rs 19,200) as transport allowance 

With these two deductions, taxpayers could reduce their taxable income by a maximum of Rs 34,200 (Rs 15,000+19,200). However, with the new standard deduction under section 16 ia, taxpayers can lower their taxable income by Rs 50,000, saving tax on the difference of Rs 15,800. 
 

Entertainment Allowance Under Section 16 (ii)

The Income Tax Act also provides deduction under Section 16 as entertainment allowance. The allowance is first included in the salary, and then the government provides a deduction based on eligibility. The government offers this allowance to government and non-government employees. 

Entertainment Allowance for a Government Employee

Any central or state government employee can claim deductions as entertainment allowance within the standard deduction under section 16 ia. Government employees can claim the entertainment allowance from their salaries, whichever is the least among the following expenses.

●    Rs 5,000 
●    20% of your basic pay, excluding perquisites, benefits, or other allowances
●    The actual amount paid by the employer as entertainment allowance

Notably, the entertainment allowance deduction amount does not depend on the amount a government employee spends on entertainment purposes. 
 

Entertainment Allowance for a Non-Government Employee

Entertainment allowance as a deduction is unavailable to non-government employees. Although their employers may pay an allowance for entertainment purposes, non-government employees can not claim the received amount as a deduction. Furthermore, employees of statutory corporations and local authorities are ineligible to claim the deduction. 

Illustration on Calculation of deduction against Entertainment Allowance

Here is a detailed calculation of deduction against entertainment allowance.

Professional Tax or Tax on Employment Under Section 16 (iii)

Some Indian states have a provision to levy a professional or direct tax on employees. The laws for the professional tax are mentioned under Article 276(2) of the Indian constitution. As per the article, every individual earning a salary must pay this tax which should be less than Rs 2,500 annually. The rules are: 

●    If the employer paid professional tax on your behalf, the amount will be included in your salary as a ‘perquisite.’ You can deduct this amount from your gross salary. 

●    You need not add the amount to your salary if the employer has already deducted the tax. 

●    The ITA allows for deducting the professional tax irrespective of the amount paid. 

●    You can claim this tax as a deduction in the same year as paying the professional tax.