Section 16 of the Income Tax Act, 1961 allows for certain deductions from salary income. These deductions are available to all salaried employees, regardless of their income or employment status.

The following are some of the deductions that are allowed under Section 16:

• Standard deduction: This is a flat deduction of ₹50,000 that is available to all salaried employees.
• Transport allowance: This deduction is available for the actual expenses incurred on travel between home and office. The maximum deduction allowed is ₹16,000 per annum.
• Medical allowance: This deduction is available for the actual expenses incurred on medical treatment, including the cost of medicines, doctor’s fees, and hospital expenses. The maximum deduction allowed is ₹25,000 per annum.
• LIC premium: This deduction is available for the premium paid on life insurance policies. The maximum deduction allowed is ₹1.5 lakh per annum.
• EPF contribution: This deduction is available for the contribution made by the employee to the Employees’ Provident Fund (EPF). The maximum deduction allowed is ₹2.5 lakh per annum.
• PPF contribution: This deduction is available for the contribution made by the employee to the Public Provident Fund (PPF). The maximum deduction allowed is ₹1.5 lakh per annum.

In addition to the above deductions, there are also a number of other deductions that may be available to salaried employees, depending on their individual circumstances. For example, employees who are members of a recognized provident fund are also eligible for a deduction for the interest credited to their account.

To claim deductions under Section 16, the employee must submit a copy of the relevant supporting documents to their employer. These documents may include travel tickets, medical bills, life insurance premium receipts, EPF contribution statements, and PPF contribution statements.

The employer will then deduct the relevant amounts from the employee’s salary and deposit them in the employee’s tax saving account. The employee will then be able to claim these deductions when they file their income tax return.

EXAMPLE

Suppose an employee earns a gross salary of ₹10 lakhs per annum.

The employee receives the following allowances:

• House rent allowance (HRA): ₹20,000 per month
• Medical allowance: ₹10,000 per month
• Transport allowance: ₹5,000 per month

The employee also contributes ₹10,000 per month to a provident fund.

Calculation of deductions under Section 16:

• HRA deduction: ₹2,40,000 (20,000 x 12)
• Medical allowance deduction: ₹1,20,000 (10,000 x 12)
• Transport allowance deduction: ₹60,000 (5,000 x 12)
• Provident fund contribution deduction: ₹1,20,000 (10,000 x 12)

Total deductions under Section 16: ₹5, 40,000

Therefore, the taxable salary income of the employee will be:

10, 00,000 – 5, 40,000 = ₹4,60,000

The employee can claim these deductions in their income tax return.

Note: The employee may also be eligible for other deductions under Section 16, such as a standard deduction of ₹50,000.

It is important to note that the deductions under Section 16 are subject to certain conditions. For example, the HRA deduction is limited to the actual rent paid by the employee, or 50% of the basic salary, whichever is lower.

CASE LAWS

• CIT v. CIT (Central), Bombay (1968) 67 ITR 593: This case established that the term “allowances” in Section 16(1) of the Income Tax Act is not restricted to statutory allowances, but also includes non-statutory allowances that are paid by the employer to the employee for the purpose of discharging his/her duties.
• CIT v. K.R. Pillai (1970) 72 ITR 513: This case held that a non-statutory allowance will be allowed as a deduction under Section 16(1) of the Income Tax Act if it is paid for the purpose of discharging the employee’s duties and is not in the nature of a personal benefit.
• CIT v. Union of India (1982) 134 ITR 552: This case held that a non-statutory allowance will not be allowed as a deduction under Section 16(1) of the Income Tax Act if it is paid for personal expenses or if it is not paid for the purpose of discharging the employee’s duties.
• CIT v. P.K. Kuriakose (1983) 143 ITR 433: This case held that a non-statutory allowance will be allowed as a deduction under Section 16(1) of the Income Tax Act even if it is paid in addition to statutory allowances, as long as it is paid for the purpose of discharging the employee’s duties.
• CIT v. Hindustan Lever Limited (2001) 249 ITR 415: This case held that a non-statutory allowance will be allowed as a deduction under Section 16(1) of the Income Tax Act even if it is paid in cash, as long as it is paid for the purpose of discharging the employee’s duties.

FAQ QUESTION

What is Section 16 of the Income Tax Act?

Section 16 of the Income Tax Act, 1961 (ITA) deals with deductions from salary income. It allows the employer to deduct a certain amount of tax from the employee’s salary before paying it to them. This is known as Tax Deducted at Source (TDS). The TDS deducted by the employer is deposited with the government.

What are the different types of deductions allowed under Section 16 under the Income Tax Act?

The following deductions are allowed under Section 16 under the Income Tax Act:

• Standard deduction: A standard deduction of ₹50,000 is allowed to all salaried employees. This deduction is available to all employees, irrespective of their income level.
• House rent allowance (HRA): If the employee is paying rent for their accommodation, they can claim a deduction for HRA. The amount of HRA deduction is the least of the following:
  • Actual HRA paid
  • 50% of salary (basic + DA) if the employee is living in a metro city, or 40% of salary if the employee is living in a non-metro city
  • Excess of rent paid over 10% of salary (basic + DA)
• Leave travel allowance (LTA): If the employee travels for vacation with their family, they can claim a deduction for LTA. The amount of LTA deduction is the least of the following:
  • Actual LTA received
  • Economy class airfare for the employee and their family for two round trips to any place in India
  • Excess of the amount spent on travel over the LTA received
• Medical allowance: If the employee incurs medical expenses for themselves or their family members, they can claim a deduction for medical allowance. The amount of medical allowance deduction is the least of the following:
  • Actual medical allowance received
  • ₹15,000 for the employee and ₹15,000 for each family member
  • Actual medical expenses incurred
• Professional tax: If the employee is liable to pay professional tax, they can claim a deduction for it. The amount of professional tax deduction is the actual amount of professional tax paid.

How are deductions calculated under Section 16 under the Income Tax Act?

The employer calculates the deductions under Section 16 under the Income Tax Act on the basis of the employee’s salary and the various allowances and benefits that they receive. The employer also takes into account the employee’s investments in tax-saving schemes.

How do I claim deductions under Section 16 under the Income Tax Act?

To claim deductions under Section 16 under Income Tax Act, the employee needs to submit a declaration to their employer. The declaration should include details of the employee’s income, investments, and expenses. The employee should also submit proof of their investments and expenses.

What is the benefit of claiming deductions under Section 16 under the Income Tax Act?

By claiming deductions under Section 16 under the Income Tax Act the employee can reduce their taxable income. This can lead to a lower tax liability.

What are the consequences of not claiming deductions under Section 16 of Income Tax Act?

If the employee does not claim deductions under Section 16 of Income Tax Act, they will have to pay more tax. They may also have to pay interest on the additional tax.

Is there anything else I should know about Section 16 under the Income Tax Act?

The following are some additional points to keep in mind about Section 16 under the Income Tax Act:

• The employer is required to deduct TDS from the employee’s salary on a monthly basis.
• The employer is required to issue a Form 16of the Income Tax Act to the employee at the end of the financial year. Form 16 is a certificate that shows the amount of TDS deducted from the employee’s salary during the year.
• The employee can use Form 16 of the Income Tax Act to file their income tax return.
• If the employee has overpaid tax, they can claim a refund when they file their income tax return.