Section 16 of the Income Tax Act 1961: Deductions from Salaries

2025-06-13

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Indian Income Tax Act 1961 provides you with multiple avenues for reducing your gross taxable income. These tax deductions reduce your tax burden especially if you are salaried.

One such tax deduction is available under section 16 of the Income Tax Act.

As per the latest reforms introduced in the Finance (No. 2) Act, 2024, the standard deduction under the new tax regime has increased from ₹50,000 to ₹75,000, effective from AY 2025-26. This makes tax filing easier and offers greater relief to salaried individuals opting for the new regime.

Key Takeaways

Section 16 offers deductions on salary: standard deduction, entertainment allowance, and professional tax paid
Standard deduction is ₹50,000 (old regime) and ₹75,000 (new regime from AY 2025-26)
Entertainment allowance deduction applies only to government employees, not private-sector staff
Professional tax paid is fully deductible under both old and new regimes, with specific conditions
The new tax regime allows only the standard deduction; other exemptions like Section 80C are not available

What is Section 16 of the Income Tax Act?

Section 16 of the Income Tax Act provides for certain deductions from the salary income. You can reduce tax incidence on your salary income with deductions under Section 16 under the following heads:

1. Standard Deduction

2. Entertainment Allowance

3. Professional Tax Paid

You should note that you can avail of these deductions and deductions under section 80 when you follow the old regime of tax slabs. If you switch to the new tax slab rates under the new regime. you would not be able to claim most deductions under Section 80 and Section 16 (except the standard deduction)

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Deductions Under Section 16 - Explained

Section 16 of the Income Tax Act applies before your net taxable income. Thus, you will need to consider the following deductions before estimating your tax liability for the year:

1. Standard Deduction

The standard deduction is a fixed amount you can deduct from your taxable salary. You can deduct the lower of the following two:

₹50,000 (for old tax regime) and ₹75,000 (for new tax regime) (Section 115BAC(1A)(ii))

2. Deduction for Entertainment Allowance

Additionally, you can claim a deduction on the Entertainment allowance. This allowance shall be first added to your salary income under the head “Salaries”. Thereafter, you can claim a deduction on it on the following grounds:

Government Employees

If you are a central or state government employee you can claim lower of the following as deduction:

₹5,000
20% (1/5th) of Basic Salary, or
Amount of the entertainment allowance

a. Private Sector Employees

Deduction for entertainment allowance is not available.

b. Employees of Statutory Corporations and Local Authorities

Deduction for entertainment allowance is not available.

Note: It is important to consider the following points to ascertain the amount of entertainment allowance deductible from your salary:

Salary will not include any allowance, benefit, or any other form of perquisites.
You can't consider your expenses towards entertainment for claiming a deduction.
You can account for the expenses you incur out of the entertainment allowance you have received

3. Professional Tax or Employment Tax

State governments in India can levee a professional income tax. You can claim this state government tax as a deduction from your final tax liability for the year with the central government.

The maximum amount state governments can deduct as professional tax is Rs 2500 in a year. Thus, this is the maximum amount of deduction you will claim under this head.

Note: Deductions under the Entertainment allowance and Professional Tax or Employment Tax are not applicable under the new tax regime.

How Does Deduction Under Section 16 Work?

The government had introduced the provision of the standard deduction in the Union Budget. The key benefit of this provision is that it provides tax relief to salaried taxpayers. The Finance Ministry raised the limit of deduction under section 16 of the Income Tax Act from ₹40,000 to ₹50,000 in the Union Budget 2019.

Previously, taxpayers could claim specific reimbursements like:

Medical allowance = ₹15,000 per annum
Transport allowance = ₹1,600 per month (i.e., ₹19,200 per annum)

The introduction of the standard deduction of ₹50,000 replaced these individual allowances, simplifying the process and providing a greater tax benefit.

Now, from Assessment Year 2025-26 onward, the standard deduction under the new tax regime has been increased to ₹75,000, making it even more beneficial for salaried taxpayers who opt for the new regime.

This means:

Under the old tax regime, the standard deduction remains ₹50,000.
Under the new tax regime (default option from AY 2025-26), the standard deduction rises to ₹75,000, significantly lowering taxable income without the need to track multiple allowances or submit proofs.

This enhanced standard deduction greatly simplifies tax calculations and offers more substantial tax relief to employees and pensioners, especially under the new regime.

Click here to use - Income Tax Calculator

Example of Section 16 Deduction in Tax Calculation

Suppose the following are your salary details:

Basic pay: ₹ 5 lakhs
Allowance: ₹ 2 lakhs
Contributions towards EPF: ₹ 24,000
PPF Deposits: ₹ 50,000
Transportation allowance: ₹ 19,200
Medical allowance: ₹ 15,000

Gross Income = (500,000 + 200,000) = ₹ 700,000

Gross Taxable Income = 700,000 – (24,000 + 50,000) = ₹ 626,000

I. Tax Calculation Before Section 16

You could claim deductions from your gross income = ₹ 34,200

Thus, your taxable income: (6,26,000 – 34,200) = ₹ 5,91,800

Your total tax payment as per the current income tax slab shall be = ₹ 12,500 (5% rate for income between ₹2,50,000 and ₹ 5,00,000)

Tax on the remaining amount = 10% of (5,91,800 – 5,00,000) = ₹9,180/-.

So, your net total tax liability: 12,500 + 9,180 = ₹21,860

II. Tax Calculation After Section 16 as per the Latest Reforms

Those opting for the old tax regime:

You can claim standard deductions from your gross income = ₹50,000

Your taxable salary income: (6,26,000 – 50,000) = ₹5,76,000

Your total tax payment as per the current income tax slab shall be = ₹12,500

Tax on the remaining amount = 10% of (5,76,000 – 5,00,000) = ₹7,600

So, your net total tax liability = 12,500 + 7,600 = ₹20,100

For those opting for the new tax regime (from AY 2025-26 onwards):

Standard deduction from gross income = ₹75,000

Taxable salary income = (₹6,26,000 - ₹75,000) = ₹5,51,000

Tax on first ₹2,50,000 = Nil (as per slab)

Tax on next ₹2,50,000 = 5% of ₹2,50,000 = ₹12,500

Tax on remaining amount = 10% of (₹5,51,000 – ₹5,00,000) = ₹5,100

Net total tax liability = ₹12,500 + ₹5,100 = ₹17,600

How to Reduce Your Tax Liability?

You can decrease your tax incidence on your salary income by investing in tax-saving investments.

Here are different types of tax-saving investment instruments on which you can claim deductions from your taxable income:

Tax-Saving Investments

Particulars	Deduction limit (in ₹)
i. The premium of the life insurance policy ii. PPF, EPF, and superannuation funds iii. Equity-linked saving scheme (ELSS) iv. National saving certificate (NSC) v. Unit Linked Insurance Plan (ULIP) vi. Tax saving Term Fixed Deposit for at least 5 years vii. Premiums paid for life insurance pension plans viii. Self-contribution to NPS (National Pension Scheme)	Up to 1.5 Lakhs
Additional deduction on: The contributions in NPS. Contributions towards Atal Pension Yojana Repayment of home loan principal (for 60+ taxpayers)	Up to 50,000

Apart from these investments, certain necessary expenses also reduce your tax liability. For example, the medical insurance premium you pay for your family or the treatment cost for your parents.

FAQs

Yes, under the old tax regime, you can claim both the standard deduction (₹50,000) and the professional tax paid (up to ₹2,500) as separate deductions from your salary income. Under the new tax regime, only the standard deduction (₹75,000 from AY 2025-26) is allowed.

No, the entertainment allowance deduction is allowed only for central and state government employees. Private-sector employees and employees of statutory corporations or local authorities are not eligible for this deduction.

From AY 2025-26 onward, salaried employees opting for the new tax regime can claim a ₹75,000 standard deduction. This helps reduce taxable income significantly without the need to submit proofs or track multiple allowances, simplifying tax filing and lowering the overall tax liability.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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