Deduction from gross salary to calculate income from salaries

In order to calculate income under the head salaries, you are allowed to claim deduction from gross salary. These tax benefits are specified under section 16 of the income tax act, 1961.

Tax benefits under section 16 is different from tax deductions allowed to an individual under chapter VI-A of the income tax act 1961.

To calculate your taxable income and actual tax liability, you can take benefits of chapter VI-A based on your eligibility in addition to the benefits of section 16.

As per section 16, following deductions are allowed from your gross salary after claiming exemptions based on your eligibility:

  • Standard deduction.
  • Deduction for entertainment allowances.
  • Any sum paid towards tax on employment. Known as professional tax.

Standard deduction from gross salary

With effect from previous year 2018-19 (assessment year 2019-20), government of India has reintroduced standard deduction under section 16. Due to this change for the previous year 2018-19 (assessment year 2019-20), you can deduct a fixed amount of Rs 40,000 from you gross salary in addition to other benefits of section 16 to calculate income under the head salary.

To take benefit of fixed standard deduction of Rs 40,000, you are not required to submit any documents to employer and income tax department.

For the previous year 2019-20 (assessment year 2020-21), government of India has increased the standard deduction limit of Rs 40,000 to Rs 50,000. This means gross salary income for the financial year starting from 1st April 2019 to 31st march 2020, can be reduced by Rs 50,000 due to the standard deduction under section 16(I).

Entertainment allowances

Deduction for entertainment allowance is allowed only for government employees. If you are working in a non-government / private organisation, then this tax benefit for entertainment allowance can not be claimed.

In case of government employees, least of the following is allowed as a deduction from gross salary:

  • Actual entertainment allowance received during the previous year.
  • Rs 5,000
  • 20% of salary exclusive of allowance, benefit or other perquisites.

Section 10 of the income tax act,1961 does not provide any exemption for entertainment allowances, therefore the only tax benefit available to you is under section 16(ii). Therefore, first you need to include entertainment allowance to your gross salary calculation, then the benefits of section 16(ii) need to be claimed.

Professional tax

Any sum paid by the employer on behalf of the employee on account of tax on employment is eligible for tax deduction from gross salary. This tax on employment is referred to as Professional tax. It’s part of employees salary, therefore first professional tax has to be included in the gross salary, then deduction should be claimed under section 16(iii) for the whole amount paid from gross salary.

After allowing these deductions from your gross salary, you will arrive at income under the head salary.

Example

Mr X is an employee of XYZ. He receives Rs 11,500 per month as basic salary; Rs 500 per month as dearness allowance and Rs 1,000 as entertainment allowance. Employer also paid Rs 2,500 as professional tax for the year.

Here is the computation of taxable salary of Mr XYZ assuming he is a not a government employee:-

Amount in Rupees

Particulars For Previous Year 2018-19 For Previous Year 2019-20
Basic salary (42,500*12) 5,10,000 5,10,000
Dearness allowance (2500*12) 30,000 30,000
Entertainment allowance (4000*12) 48,000 48,000
Gross salary 5,88,000 5,88,000
Less: deduction under section 16    
Standard deduction (40,000) (50,000)
Deduction for Entertainment allowance Nil Nil
Professional tax (2500) (2500)
Income chargeable under the head salaries or taxable salary 5,45,500 5,35,500

Here is the computation of taxable salary of Mr XYZ assuming he is a government employee:-

Amount in Rupees

Particulars For Previous Year 2018-19 For Previous Year 2019-20
Basic salary (42,500*12) 5,10,000 5,10,000
Dearness allowance (2500*12) 30,000 30,000
Entertainment allowance (4000*12) 48,000 48,000
Gross salary 5,88,000 5,88,000
Less: deduction under section 16    
Standard deduction (40,000) (50,000)
Deduction for Entertainment allowance (5,000) (5,000)
Professional tax (2500) (2500)
Income chargeable under the head salaries or taxable salary 5,40,500 5,30,500

Calculation of deduction for entertainment allowance:

Least of the following will be allowed as a deduction for entertainment allowance if X is in government service.

  • Rs 5000
  • 20% of Rs 138000 = Rs 27,600
  • Actual entertainment allowance received = Rs 12,000

Below is a list of important tax deductions available to an individual under chapter VI-A of the income tax act,1961 on gross total income in addition to the above deductions from gross salary.

  • Section 80C – in respect of life insurance premium, contributions to Public provident fund, EPF, Tution fees etc
  • 80ccc – contribution to pension fund
  • 80ccd – Contribution to NPS-national pension system
  • 80ccg – in respect of investment made under any ESS
  • 80d – in respect of medical insurance
  • 80dd – maintenance including medical treatment of a dependent being a person with disability
  • 80ddb – in respect of medical treatment
  • 80e – interest on loan taken for higher studies
  • 80ee – interest on loan taken for residential house property
  • 80g – donation to certain funds, charitable institutions etc.
  • 80gg – Deduction in respect of rent paid
  • 80gga – Certain donations for scientific research or rural development
  • 80ggc – Contribution given to political parties
  • 80ia – products and gains from industrial undertaking or enterprises engaged in infrastructure development.
  • 80iab – profits and gains by an undertaking or enterprise engaged in development of special economic zone.
  • 80ib – profits and gains from certain industrial undertaking other than infrastructure development undertaking.
  • 80iba – profits from housing project
  • 80ic –  profits and gains of certain undertaking in certain special category of states
  • 80id – in the case of hotels and convention center in NCR
  • 80ie – in respect of undertaking in north-eastern states
  • 80jja – in respect of profits and gains from the business of collecting and processing of biodegradable waste.
  • 80jjaa – in respect of employment of new employees
  • 80qqb – in respect of royalty income of authors
  • 80rrb – in respect of royalty of patents
  • 80tta – in respect of interest on deposits in saving accounts
  • 80u – in case of a person with disability

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.