Section 16 of the Income Tax Act, 1961, provides deductions from salary income to reduce taxable income. It includes:
- Standard Deduction (Section 16(ia)): A flat deduction from salary income.
- Entertainment Allowance (Section 16(ii)): Deduction for government employees.
- Professional Tax (Section 16(iii)): Deduction for tax paid to the state government.
Standard Deduction (Section 16(ia))
The standard deduction is a fixed amount subtracted from your salary income, reducing your taxable income.
- Old Tax Regime: ₹50,000
- New Tax Regime: ₹75,000
This deduction is available to all salaried individuals and pensioners. It is automatically applied; no documentation is required.
Who Can Claim the Standard Deduction?
- Salaried Employees: Individuals receiving a salary from an employer.
- Pensioners: Individuals receiving a pension from a former employer.
Note: Family pensioners (receiving pension after the death of the employee) can claim a deduction under Section 57(iia), not under Section 16.
Example Calculation
Scenario: An individual has a gross salary of ₹8,00,000.
- Old Tax Regime:
- Gross Salary: ₹8,00,000
- Less Standard Deduction: ₹50,000
- Taxable Income: ₹7,50,000
- New Tax Regime:
- Gross Salary: ₹8,00,000
- Less Standard Deduction: ₹75,000
- Taxable Income: ₹7,25,000
This deduction lowers the taxable income, resulting in tax savings.
How to Claim the Deduction
The standard deduction is automatically applied by your employer and reflected in Form 16. When filing your Income Tax Return (ITR), ensure that the deduction is correctly accounted for in the ‘Income from Salary’ section.
Comparison: Old vs. New Tax Regime
| Feature | Old Tax Regime | New Tax Regime |
|---|---|---|
| Standard Deduction | ₹50,000 | ₹75,000 |
| Other Deductions (e.g., 80C, HRA) | Available | Not Available |
| Tax Rates | Higher | Lower |
The new tax regime offers a higher standard deduction but does not allow other common deductions. Choose the regime that results in lower tax liability based on your income and eligible deductions.
Key Takeaways
- Section 16 provides deductions to reduce taxable salary income.
- The standard deduction is ₹50,000 under the old regime and ₹75,000 under the new regime.
- It is automatically applied; no proof or documentation is needed.
- Available to all salaried individuals and pensioners.
- Choose between old and new tax regimes based on which offers greater tax savings for your situation.
Understanding and utilizing the standard deduction under Section 16 can lead to significant tax savings for salaried individuals and pensioners. Always review your Form 16 and consult with a tax professional if needed to ensure you’re maximizing your eligible deductions.
