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Salary Deduction and Related Provisions | Company Vakil

Standard Deduction as per Section 16 of the Income Tax Act

Employees were able to claim a standard deduction as a salary deduction under Section 16 of the Income Tax Act until the assessment in year 2005-06. However, this deduction is no longer in existence. As a result, it can be said that a standard deduction as a salary reduction, under Section 16 is no longer applicable.

Salary under Income Tax Act

The term ‘salary’ has been refered under section 17(1) of the Income Tax Act. Furthermore, it includes salary, perquisites, and profits in lieu of salary.

Income categorized as Salary under the Income Tax Act

  1. Firstly, wages.
  2. Pension.
  3. Gratuity.
  4. Fees, commission, perquisites etc.
  5. Salary advance.
  6. Furthermore, encashment of leave.
  7. Annual accretion to the balance at the credit of an employee participating in the recognized provident fund, to the extent to which it is chargeable to tax.
  8. Even more, where recognition is given to a provident fund with existing balances, the balance available to the credit of each employee which is conveyed to his account in the recognized provident fund is called transferred balance.
  9. Finally, the contribution made by the Central Government or any other employer in the year before, to the employee under the National Pension Scheme.

What is a salary deduction as per section 16 of the Income tax act

In salary deductions, certain items are reduced from taxable salary to arrive at the final income from salaries. In other words taxable salary less salary deductions = income from salary.

Computation of income from salaries

    1. Firstly, add all taxable allowances and perquisites.
    2. Furthermore, we compute deductions to obtain at income from salaries.

Salary deductions are of two types:

  1. Firstly, entertainment allowance. [defined under section 16( ii)]
  2.  Professional tax [defined under section 16 (iii)].

Consequently, both these kinds are reduced to arrive at the income from salary.

The format of salary deduction

Particulars Amount received Exempt taxable
BASIC SALARY 24000 0 24000
+TAXABLE ALLOWANCES 12000 0 12000
+TAXABLE PERQUISITES 6000 0 6000
GROSS TAXABLE SALARY 42000 0 42000
LESS DEDUCTIONS
ENTERTAINMENT ALLOWANCE 4800 4800
PROFESSIONAL TAX 500 500
INCOME FROM SALARY 36700 36700

Entertainment Allowance [Section 16 (ii)]

While we  compute gross salary, entertainment allowance is first taken into account. Thereafter a standard deduction is allowed as per Section 16(ii). Although only a government employee can claim an entertainment allowance. Furthermore, the maximum limit for its claim is 5000.

Section 16(ii)

Where the employee is in receipt of entertainment allowance, the amount so received shall first be included in the salary income and thereafter the following deduction shall be made:

16(ii). A deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less.

Also, entertainment allowance is also known as sumptuary allowance.

Professional Tax [section 16(iii)]

Most noteworthy, State Governments and Local Authorities are given the authority to receive professional taxes on professions, trades, callings, and employment. Hence a professional tax is charged from employees. In some corporation, employers pay the professional tax from their pockets, while in the other cases, the employers treat it as a salary deduction. Another name for the Professional tax is income from employment. Above all, the quantum of professional tax charged does not exceed Rs.2500 per annum.

Who can claim

Furthermore, under section 16(iii), a salary deduction can be claimed by the taxpayer on account of professional tax paid. Above all, the deduction for professional tax will be permitted in the year in which the tax is actually paid. Professional tax due but not paid cannot be considered as a salary deduction. It is not allowed as a deduction.

In case of income tax it is permitted as a deduction and not as an exemption which is shown below:

If paid by the employer, it is considered in the total income as the benefit which is given by the company and thereafter deduction is done.

Rather, if paid by the employee, it is not taken into account in total income as no monetary remuneration is received by the employer. Furthermore, it is only permitted as a deduction

Income Tax

Above all, one of the significant salary deductions is income tax. Furthermore, tax is deducted at source at the income which is taxed at the end of the financial year. Professionals, who get paid for their work, normally pay around 10% income tax, which is deducted at source. In contrast, the salaried employees do not have to pay such upfront tax.

Provident Fund

Above all, The next vital deduction which takes place every month is towards Provident Fund. Half of this contribution is made by the employee, whereas, the employer contributes the other half. Most noteworthy, It provides financial security to the employee.

 

Summary

Above all, it can be said that salary deductions are amount withheld from a taxpayer from his taxable salary. The term ‘salary’ has been described under section 17(1) of the Income Tax Act. Furthermore, Several incomes are considered as salary under the ambit of income tax act. Finally, to name a few, wages, annuity etc. For more details visit company vakil

 

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