Deductions under Section 16 – Standard, Entertainment & Employment Tax
From gross salary to net salary - Section 16 provides 3 key deductions. In FY 2025-26, standard deduction alone saves ₹75,000 in taxes! Let's explore all three.
Section 16 - Deductions from Salary
Three deductions allowed:
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Section 16(ia) - Standard Deduction
History:
- Removed in Budget 2005
- Reintroduced in Budget 2019 at ₹40,000
- Increased to ₹50,000 in 2019-20
- Increased to ₹75,000 in Budget 2025 (new regime)
Current rates (FY 2025-26):
- New regime: ₹75,000
- Old regime: ₹50,000
Conditions:
- Salaried individuals only
- Pensioners also eligible
- No proof required (flat deduction)
- Applied automatically
Calculation: Lower of:
- ₹75,000 (or ₹50,000 in old regime)
- Actual salary received
Example 1:
Salary: ₹10,00,000
- Standard deduction: ₹75,000
- Net salary: ₹9,25,000
Example 2:
Salary: ₹30,000
- Standard deduction: ₹30,000 (lower of salary or ₹75k)
- Net salary: Nil
Why Standard Deduction?
Purpose: Simplify tax filing by removing need for:
- Transport allowance claims
- Medical reimbursement receipts
- Other minor expense proofs
Before 2019: Taxpayers claimed ₹19,200 transport + ₹15,000 medical = ₹34,200
After 2019: Flat ₹40k (now ₹75k), no receipts needed! ✅ simpler
Tax savings (30% bracket):
- ₹75,000 × 30% = ₹22,500 saved annually!
Section 16(ii) - Entertainment Allowance
Applicable to: Government employees ONLY
Private sector: NOT allowed (entertainment allowance fully taxable)
Deduction: Least of:
- Actual entertainment allowance received
- ₹5,000
- 20% of basic salary
Example:
Govt Employee:
- Basic: ₹50,000/month = ₹6,00,000/year
- Entertainment allowance: ₹3,000/month = ₹36,000/year
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Note: This is a deduction from income, not exemption!
Section 16(iii) - Professional Tax
State-level tax on professions/employment
Paid by: Employee (deducted by employer)
Rates: Vary by state (₹200 to ₹2,500/year)
Examples:
- Maharashtra: ₹2,500/year
- Karnataka: ₹2,400/year
- West Bengal: ₹2,500/year
- Tamil Nadu: ₹2,500/year
- Gujarat: No PT (₹0)
Deduction: Actual professional tax paid during the financial year
Example:
Mr. Kumar (Maharashtra):
- Professional tax paid: ₹2,500
- Deduction u/s 16(iii): ₹2,500
Full amount deductible!
Computation Format - Gross to Net Salary
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Practical Example - Complete Deduction
Mrs. Sharma (Govt employee, Maharashtra, FY 2025-26, New Regime):
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After HRA exemption (separate calculation): Further reduced!
Comparison: Old vs New Regime Standard Deduction
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Important Points
1. Automatic Deduction:
- Standard deduction applied automatically by employer in Form 16
- No need to claim separately
2. Pensioners:
- Also eligible for standard deduction
- Family pensioners: NO (different rules)
3. Multiple Employers:
- Standard deduction once per financial year (not per employer)
- If 2 employers, employer-2 should not give standard deduction again
4. Part-Year Employment:
- Full ₹75k even if worked 6 months (as long as salary ≥ ₹75k)
State-wise Professional Tax Rates
| State | Annual PT | Monthly Deduction |
|---|---|---|
| Maharashtra | ₹2,500 | ₹200/month + ₹300 in Feb |
| Karnataka | ₹2,400 | ₹200/month |
| West Bengal | ₹2,500 | Varies by salary slab |
| Tamil Nadu | ₹2,500 | ₹208.33/month approx |
| Andhra Pradesh | ₹2,400 | ₹200/month |
| Gujarat | ₹0 | No PT |
| Delhi | ₹0 | No PT |
| UP | ₹0 | No PT |
Maximum PT: ₹2,500/year (Constitutional limit)
Tax Savings Calculation
Example: ₹12 lakh salary, 30% tax bracket
Without Section 16:
- Tax on ₹12L: ₹2,37,500
With Section 16 (₹75k standard + ₹2,500 PT):
- Tax on ₹11,22,500: ₹2,14,250
Savings: ₹23,250 just from Section 16! 💰
Budget 2025 Impact
Old (FY 2024-25):
- New regime: ₹50k standard deduction
- Old regime: ₹50k
New (FY 2025-26):
- New regime: ₹75k (50% increase! 🎉)
- Old regime: ₹50k
Benefit: Additional ₹25k deduction in new regime
Tax saved (20% bracket): ₹25k × 20% = ₹5,000
Impact: Makes new regime even more attractive!
Summary
- Section 16: 3 deductions from gross salary - standard, entertainment, professional tax
- Standard deduction (16ia): ₹75,000 (new regime FY 2025-26), ₹50,000 (old regime) - no proof needed
- Entertainment (16ii): Govt employees only, max ₹5,000 (least of 3)
- Professional tax (16iii): State-wise (max ₹2,500/year), fully deductible
- Format: Gross salary - Section 16 deductions = Net salary
- Budget 2025: Standard deduction hiked 50% to ₹75k in new regime
- Example: ₹10.56L gross → ₹9.735L net (after ₹75k + ₹5k + ₹2.5k deductions)
Quiz Time! 🎯
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