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Section 15 and 16 of Income Tax Act 1961

What is Salaries? What are Deductions from salaries? Section 15 and 16 of Income Tax Act 

Salaries and Deductions from salaries are defined under section 15 and 16 of Income Tax Act 1961.

Section 15 of Income Tax Act Salaries

  • any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him.
  • any salary due from an employer or a former employer to an assesses in the previous year, whether paid or not.
  • any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

clarification :- Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as salary for the purposes of this section.

Section 16 of Income Tax Act Deductions from salaries

The income chargeable under the head “Salaries” is computed after making the following deductions under Section 16 :

  1. Standard Deduction ;
  2. Entertainment Allowance Deduction ; and
  3. Professional Tax 

(A) Standard Deduction section 16(i) (ia)

  • the Amount of Salary,
  • Standard deduction is Rs. 40,000

(B) Entertainment Allowance of section 16 (ii):

(1)  In the case of a Government employee (i.e., a Central Government or a State Government employee), the least of the following is Deductible

  • 20 % of Basic Salary
  • Rs. 5,000
  • Amount of Entertainment Allowance granted during the previous year

In order to control amount of entertainment allowance deductible from salary, the following points need consideration:

  • Amount actually expended towards entertainment (out of entertainment allowance received) is not taken into consideration.
  • for this purpose “salary” excludes any allowance, benefit or other advantage.

In the case of a Non-Government Employee:

  1. Entertainment Allowance is NOT deductible.

Professional Tax section 16(iii):

  1. If the professional tax is paid by the employer on behalf of an employee, it is first included in the salary of the employee as a advantage and then the same amount is allowed as deduction on account of professional tax from gross salary.
  2. Deduction is available only in the year in which professional tax is paid
  3. There is no monetary ceiling under the Income-tax Act. Under article 276 of the Constitution, a State Government cannot impose more than Rs. 2,500 per annul as professional tax. Under the Income-tax Act, however professional tax is paid during the previous year, is deductible.
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