If you're wondering whether or not you can claim a deduction under Section 80C if they are already claiming one under Section 16C, then you have come to the right place!
Introduction:
Standard deduction is a tax benefit provided to salaried individuals in India under Section 16 of the Income Tax Act. It offers a fixed deduction from the total salary income, reducing the taxable income and thereby lowering the tax liability of the taxpayer. The introduction of standard deduction came into effect from the Financial Year (FY) 2018-2019, providing relief to the salaried class. In this comprehensive blog, we will delve into the intricacies of standard deduction under Section 16, including its various components, benefits, calculation methods, and the necessary documentation to claim it. Additionally, we will address frequently asked questions to clarify common doubts related to this tax provision.
What is the Income Tax Act Section 16?
Three different tax deductions can be taken from your salary income under Section 16 of the Income Tax Act. Your income will be lessened by these deductions, which will reduce your tax obligation.
The following items qualify as deductions under Section 16:
Standard Deduction under Section 16 (ia):
Section 16 (ia) of the Income Tax Act allows a standard deduction to be claimed by salaried employees. It was reintroduced in the FY 2018-2019 and currently provides a fixed deduction of a certain amount from the total salary income. This deduction is applicable to all salaried individuals, irrespective of their age or employment type.
Section 16 of the Income Tax Act incorporates the standard deduction under 16 ia, enabling salaried employees to reduce their taxable income. Introduced in the 2018 budget by the Indian Finance Minister, it replaced the ₹15,000 medical allowance and ₹19,200 transport allowance per annum. Until 2019, the standard deduction under 16 ia stood at ₹40,000 before being raised to ₹50,000 in the 2019 budget.
Presently, the standard deduction under 16 ia allows a tax deduction of ₹50,000, replacing the medical and transport allowance. This deduction does not necessitate the taxpayer to submit any documents as proof of ₹40,000 expenditure, as it offers a straightforward flat deduction from the taxable income.
Applicable to all salaried individuals, including pensioners, the standard deduction holds regardless of the actual salary amount received. However, it cannot exceed the individual’s salary during the year. Moreover, taxpayers cannot claim the standard deduction in addition to any other deduction available under Section 16, such as HRA or conveyance allowance.
Deduction for Entertainment Allowance under Income Tax Section 16(ii):
Before the reintroduction of the standard deduction, employees were entitled to claim a deduction on entertainment allowance under Section 16(ii). However, with the introduction of the standard deduction, the benefit of claiming entertainment allowance has been withdrawn. Currently, no separate deduction for entertainment allowance is allowed.
Deduction for Professional Tax Paid on Salary Income under Section 16(iii):
Section 16(iii) allows salaried employees to claim a deduction for the professional tax they pay on their salary income. Professional tax is a state-level tax levied by some states on individuals who earn an income, including salaried individuals. The amount of professional tax varies from state to state and is deducted from the salary by the employer before disbursing it to the employee. The total amount of professional tax paid during the financial year is eligible for deduction under Section 16(iii).
How to Calculate Standard Deduction if You Worked Under Multiple Employers in the Same Financial Year?
If an individual has worked under multiple employers during a financial year, the standard deduction can be claimed only once. It is essential to ensure that the deduction is claimed correctly in the tax return filed with the Income Tax Department. To calculate the standard deduction in such cases, follow these steps:
- Identify the total amount of standard deduction available for the financial year.
- Determine the total salary income received from all employers during the financial year.
- Subtract any other deductions claimed from the salary income, such as HRA, EPF, etc.
- Apply the standard deduction amount to the remaining salary income.
- The resultant amount will be the taxable income after standard deduction for the financial year.
What Are the Benefits of Standard Deduction on Tax for Salaried Individuals?
The standard deduction offers several benefits to salaried individuals:
- Simplification: Standard deduction simplifies the tax filing process as it provides a fixed deduction without the need for maintaining extensive records of expenses incurred.
- Increased Tax Savings: The fixed deduction reduces the taxable income, leading to increased tax savings for salaried employees.
- Universality: Standard deduction is applicable to all salaried individuals, irrespective of their salary levels or job profiles.
- No Need for Expense Proof: Unlike various other deductions, standard deduction does not require submitting any bills or proofs of expenses incurred, making it hassle-free for taxpayers.
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What Are the Documents or Bills Necessary to Claim the Standard Deduction?
As standard deduction does not require any expense proofs, salaried individuals do not need to submit any specific documents or bills to claim this deduction. However, it is essential to maintain proper salary statements and Form 16 received from the employers as they provide the necessary details for tax computation and filing.
How Can One Claim a Standard Deduction Under Section 16?
Usually, when calculating TDS, or tax deducted at source (relevant to your yearly salary), the employer will add this deduction. Form 16 will show the amount that was issued by the employer. If not, you can file it at the same time as your income tax return.
Allowances Eligible for Standard Deduction on Salary
Let’s first define standard deductions before we explore the qualifying allowances.
These are the components of your wage or income that are exempt from federal taxation.
These deductions might lower your tax liability.
Any salaried individual may claim these deductions, regardless of the category.
The 2019 interim budget added more tax benefits for salaried workers, one of which being a large increase in standard deductions from INR 40,000 to INR 50,000.
The New Tax Regime was implemented in the year 2020, although it is up to the taxpayer to decide whether to file their claims under the New Tax Regime or the Old Tax Regime.
| Old Tax Regime (2021- 22) | Particulars | New Tax Regime (2021- 22) |
| INR 5 lakhs | Salary Income | INR 5 lakhs |
| INR 50,000 | Standard Deduction | NA |
| INR 4,50,000 | Taxable Salary | INR 5 lakhs |
According to Section 16, the following deductions are permitted:
Standard Deductions on salary
- INR 50,000 from Income tax Assessment Year 2022-21
- Salary Amount
- Transport allowances
- Medical Allowances
- Entertainment Allowances
- Professional Tax
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Can One Claim Deductions Under Section 80C and Other Sections if One Has Already Claimed Standard Deduction Under Section 16?
Yes, One can still take advantage of all other tax deductions and exemptions even after using the standard deduction for salary income. In other words, one can claim both 80C Deductions and Standard Deduction along with deduction mentioned under section 16.
Tax Deductions under Section 80C
Hindu Undivided Families as well as individuals are eligible for tax deductions under Section 80C of the Income Tax Act on a number of payments.
A combination of the deductions allowed under Sections 80 C, Section 80 CCC, and 80 CCD, up to a total of Rs 1.5 lakh per year, are available to eligible taxpayers under Section 80C.
The following list includes some well-known investments that qualify for this tax deduction.
- Funds allocated for life insurance policies (for self, spouse, or children)
- Contribution made to a pension or provident fund
- tuition fees paid for a maximum of two children’s education
- Funds allocated for the building or purchase of a residential property
- Payments are made toward a fixed deposit with a five-year minimum term.
- This section allows for a number of additional deductions, including purchases of NABARD bonds, participation in senior citizen savings plans, and mutual fund investments.
Standard deduction under Section 16 vs income tax deductions under Chapter VI-A, including Section 80
| Standard deduction | Tax Deduction Under Chapter VI-A |
| Standard deduction is fixed | It depends on the actual expenditure |
| It can only be availed by individuals with a salaried income or pension.. | It is calculated on the gross income, which is the sum total of the earnings from all income streams. |
| It can be applied before calculating the gross income on the salary. | It is applied after gross income is calculated.. |
| It is constant at ₹ 50,000. | The limits vary |
Eligible Deductions Under Section 80C
Section 80C of the Income Tax Act of 1961 allows deductions for the following payments and purchases.
- Life Insurance: All life insurance premium payments are eligible for tax breaks under Section 80C. The premiums paid to insure oneself, one’s spouse, one’s dependent children, and any other members of the Hindu Undivided Family are eligible for this deduction.
- Sukanya Samriddhi Yojana : Sukanya Samriddhi Yojana is a savings programme for girls that qualifies for a tax deduction under Section 80C of the Income Tax Act of 1961.
- Public Provident Fund: Contributions to the Public Provident Fund (PPF) are deductible from income under Section 80C.
- Equity Linked Saving Scheme: Section 80C of the Income Tax Act allows for tax deductions for equity investments linked savings schemes.
- Charges: The stamp duty and registration fees are among the biggest costs you will incur when purchasing a property. The government has included these costs under Section 80C of the Income Tax Act of 1961 in order to provide some relief to taxpayers.
- Senior Citizens Savings Scheme: Section 80C of the Income Tax Act allows investments made in the Senior Citizens Saving Scheme, which as its name implies is appropriate for senior citizens, to be deducted.
Conclusion:
Standard deduction under Section 16 provides significant tax relief to salaried individuals, simplifying the tax filing process and increasing tax savings. It is a fixed deduction available to all salaried employees, and no separate documentation is required to claim this benefit. However, taxpayers must ensure that they comply with the relevant tax regulations and accurately calculate their taxable income after considering the standard deduction. As tax laws and provisions may change over time, it is essential to stay updated with the latest tax regulations and consult a tax professional if needed to maximise the benefits of standard deduction and other applicable tax provisions.
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