Deductions under the head Salaries – Section 16

Deductions under Salaries

Deductions under the head Salaries are updated for June 2023 and Dec 2023 Exams. These notes are beneficial for CS Executive New Syllabus of ICSI.  

Deductions from salaries or statutory deductions under the head salaries (Section 16)

Under Section 16 of Income Tax Act, 1961 only 3 deductions are allowed from the gross salary namely:—

  • Standard deduction of Rs. 50,000 or the amount of salary, whichever is less (allowed in case of all employees
  • Deduction in respect of entertainment allowance (allowed only in case of government employees
  • Deduction in respect of tax on employment by State Government (allowed in case of all employees) 

Deduction in respect of entertainment allowance [Section 16(ii)]
Entertainment allowance means an allowance given to the employee by the employer for compensating the
expenses done by employee out of his/her pocket for entertaining the clients of employer (for example money
spent for providing tea or coffee to the clients).

For the purpose of taxability of entertainment allowance, employees can be divided into 2 categories:
1. Government Employees (who is in receipt of a salary from the Government) and
2. Non-government

Deductions from salaries or statutory deductions under the head salaries (Section 16)

Under Section 16 of Income Tax Act, 1961 only 3 deductions are allowed from the gross salary namely:—

  • Standard deduction of Rs. 50,000 or the amount of salary, whichever is less (allowed in case of all employees
  • Deduction in respect of entertainment allowance (allowed only in case of government employees
  • Deduction in respect of tax on employment by State Government (allowed in case of all employees) 

Deduction in respect of entertainment allowance [Section 16(ii)]
Entertainment allowance means an allowance given to the employee by the employer for compensating the
expenses done by employee out of his/her pocket for entertaining the clients of employer (for example money
spent for providing tea or coffee to the clients).

For the purpose of taxability of entertainment allowance, employees can be divided into 2 categories:
1. Government Employees (who is in receipt of a salary from the Government) and
2. Non-government

Tax treatment of Entertainment Allowance

In case of non-government employees
Entertainment allowance is 100% taxable. No deduction allowed.

In case of government employees
Minimum of the following is allowed as deduction from the gross salary:
1. Sum actually received as entertainment allowance, or
2. 20% of the basic salary, or
3. Rs. 5000

deduction of entertainment allowance

Deduction in respect of Professional tax or Employment Tax or Tax on employment by State Government
[Section 16(iii)]
Professional tax is a tax on employment. Under Article 276 of the Constitution, State Government/Local
Authorities can impose this tax.

Treatment of Professional Tax or Employment Tax
100% deduction is allowed from the gross salary for all employees (whether government or non-government)
Note: If professional tax is paid by employer on behalf of employee, it shall be first added in the gross salary.

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