The income subject to tax under the head salaries is deducted in accordance with Section 16. It gives exemptions from professional tax, the standard deduction, and the entertainment allowance. With this deduction, a salaried employee who pays tax could lower the taxable salary income chargeable to tax.
STANDARD DEDUCTION
[SEC.16(ia)]
Lower of the following shall be allowed as standard deduction to all employee:
- 50,000
- Amount of gross salary
ENTERTAINMENT
ALLOWANCE [SEC. 16(ii)]
The entertainment
allowance is initially added to salary income, after which a deduction is given
based on a few requirements. The benefit must be one that an employer has given
the taxpayer particularly as an entertainment benefit.
Deduction for Entertainment allowance being minimum of the following:
- Actual Entertainment Allowance
- Rs. 5,000
- 20% of Basic Salary.
Entertainment
allowance is initially included in taxable allowances as fully taxable.
Thereafter, a deduction Is allowed under this section from gross taxable
salary. However, deduction u/s 16(ii) shall be available to the Government
employee only.
Notes:
• Deduction allowed shall be irrespective
of actual expenditure incurred, whether
for office or personal purpose.
• No deduction is available under this
section to a non-government employee.
TAX ON EMPLOYMENT OR PROFESSIONAL TAX [SEC.16(iii)]
Tax on
employment, profession, trade, etc. levied by a State under Article 276 of the
Constitution will be allowed as Deduction on cash basis, whether paid by
employee or by employer (on behalf of employee) from gross taxable Salary.
Tax point:
• The taxpayer
must claim the deduction only in the financial year in which the professional
tax is actually paid to the government
• The tax paid by
the employer on behalf of the employee is also eligible for deduction. Here,
the amount paid by the employer as the professional tax will be first included
as a prerequisite in the total salary. Later the 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 limit on the deduction. The
deduction solely depends on the actual amount of professional tax. However, any
state government cannot levy more than rs 2500 annually as a professional tax.
Only the tax paid is eligible for deduction and not the interest or late fee
for delay or non-payment of professional tax.
Note:
If employer (on behalf of employee) pays Professional tax, then:
- Firstly, it is to be included as taxable perquisite; and
- Further, it is allowed as deduction u/s 16(iii).
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