Deductions are items which are reduced from Taxable Salary to arrive at Income from Salaries

Taxabie Salary

Less

Deductions

=Income from Salary

 

For Computing Income from Salaries.

  1. First we add all Taxable Allowances and Perquisites
  2. Then we Calculate Deductions under Section 16 to arrive at Income from Salaries

        Step 1 - Step 2 is Income from Salaries

 

There are basically 2 deductions

  1. Entertainment Allowance [ Section 16(ii)]
  2. Professional Tax [ Section 16(iii)]

Both these are reduced to arrive at Income from Salary

Format

Particulars Amt. received Exempt Taxable
Basic Salary xx xx xx
+Taxable Allowance xx xx xx
+Taxable Perquisites xx   xx
Gross Taxable Salary     xx
Less      
Deductions      
Entertainment Allowance     xx
Professional Tax     xx
Income from Salary     xx

  Lets study these 2 deductions one by one

 

Entertainment Allowance Section 16(ii)

 

Normally for allowances, the amount exempt is mentioned. However for entertainment allowance, deduction amount is provided in Income tax and not the exemption amount.

The total amount of Entertainment Allowance is first included in Gross Salary and then deduction is provided

 

Maximum deduction is lower of the following

  • Actual amount received
  • 20% of basic salary
  • 5000 

However, this deduction is provided only for Government employees. For Non Government employees it is fully taxable

Note :- Entertainment  allowance is also called sumptuary allowance  

 

Question 1            

Basic salary  Rs 20000 per month

Dearness allowance (DA) Rs 10000 per month

Entertainment allowance   Rs 5000 per month  

Calculate income from salary assuming employee is a Government Employee

View Answer

 

Question.2   

Solve Question 1 assuming it a non government employe e  

View Answer

 

 

Professional tax / tax on employment Section 16(iii)

 

In some states in India, State Governments charge Professional Tax from the employees.

While In some companies, employers pay this professional tax from their pocket while in others they deduct it from employees salary.

In Income tax it is allowed as deduction and not exemption as shown below

If it is paid by employer

it is included in Total income as it is  a benefit provided by company and then Deduction is provided

 

If it is paid by employee,

It is not included In Total Income as no money is received from employer .It is only allowed as deduction

Note:-

If professional tax is due but not paid, then not allowed as deduction

 

 

 

Question 1                 

Basic salary = Rs. 20000 per month

Professional tax = Rs. 500 per month

Calculate Income from salary if professional tax Paid by employer 

View Answer

Question 2

Solve Question 1 assuming employee pays professional tax

View Answer

 

New Standard Deduction under Section 16(ia)

( Applicable for F.y 2018-19, A.Y 2019-20)  

 

Deduction under section 16(ia) states that a taxpayer having income chargeable under the head 'Salaries' shall be allowed a deduction of Rs. 40,000

or the amount of salary, whichever is less, for computing his taxable income.

 

Now all Employees will get a Standard Deduction of 40000 per annum

 

Hence,their Income will be reduced by 40000 while calculating tax

 

Benefit of Standard Deduction is only for Salaried Individuals(Not for those having Business Income)  

It is not applicable for Current ITR (F.Y 2017-18)(A.Y 2018-19)

 

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  1. Income Tax
  2. Income from Salaries

About the Author

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CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 8 years. He provides GST Training in Delhi. Register now.