Section 16 of ITA, 1961 : Section 16: Deductions From Salaries

Explanation using Example

Let's say Mr. Sharma is a government employee earning an annual salary of ₹6,00,000. He receives an entertainment allowance of ₹20,000 for the year. Additionally, he pays a professional tax of ₹2,500 to the state government. Here's how Section 16 of the Income-tax Act, 1961 would apply to him:

• Under clause (ia), Mr. Sharma is eligible for a standard deduction of ₹50,000 from his salary income.
• Under clause (ii), he can claim a deduction for the entertainment allowance. The lesser of one-fifth of his salary (₹1,20,000) or ₹5,000 is allowed as a deduction. In his case, ₹5,000 is less, so he can deduct this amount.
• Under clause (iii), the professional tax of ₹2,500 paid by him is also deductible from his salary income.

After these deductions, Mr. Sharma's taxable salary income would be calculated as follows:

₹6,00,000 (Salary) - ₹50,000 (Standard Deduction) - ₹5,000 (Entertainment Allowance Deduction) - ₹2,500 (Professional Tax Deduction) = ₹5,42,500 (Taxable Salary Income).