Income from Salary - Deductions

INCOME FROM SALARIES

DEDUCTIONS FROM SALARY
So far we have discussed about calculating the gross salary of the employee i.e Taxable payments + Taxable allowances + Taxable value of perquisites.
From the gross salary calculated as above, the following are to be deducted u/s 16(ii) and 16(iii) to arrive at “Income from Salary” in the previous year.
Deductions from Gross Salary u/s 16

1. Entertainment allowance [Section 16(ii)]
2. Professional Tax [Section 16 (iii)]

1. Entertainment allowance [Section 16 (ii)]
a) Government Employees
· The actual entertainment allowance received by a government employee is first included in arriving at his gross salary.
· Thereafter, from the gross salary, the least of the following should be deducted :

i) One-fifth of his basic salary or
ii) Rs. 5000/- or
iii) Entertainment allowance actually received

Note : To claim the deduction, it is not necessary that the employee should have actually spent the entertainment allowance received. The amount actually spent is also not important. Whether he spends more less or nothing out of the entertainment allowance is not at all relevant to claim the above deduction.

b) Non – government employees
· The actual amount of entertainment allowance received should be included in arriving at the gross salary of thee employee.
· No deduction is available to non – government employees towards entertainment allowance received. The full amount is taxable.

2. Professional Tax [Section 16 (iii)]
· It is a tax to be paid by every employee to the State Government.
· Professional tax actually paid by the employee during the previous year is allowed as a deduction from Gross salary of the employee.
· Sometimes, the employer either pays the professional tax on behalf of the employee or reimburses the professional tax amount to the employee. In these case, the amount paid / reimbursed by the employer should be included in calculating the gross salary of the employee and then deducted from gross salary u/s 16 (iii).

SPECIAL POINTS

a) Relief Under Section 89
i) Under the following circumstances, an employee’s taxable income may be higher and may be taxed at higher rate of Income tax (higher slab)
· The employee receives in a previous year salary for more than 12 months.
· The employee receives in a previous year arrears of salary pertaining to earlier previous year/s which were not taxed in such earlier previous year/s on due basis.
· The employee receives advance salary (i.e. salary for the later previous year/s) in a previous year.
· The employee receives profits in lieu of salary pertaining to earlier previous year/s which were not taxed in such earlier previous year/s.
In the above cases, the employee can make an application U/S 89 to the Assessing (Income tax) Officer for relief. The Assessing officer shall grant such relief to the assessee as prescribed in rule 21A.
· Similarly, a member of the employee’s family may receive arrears of family pension in a previous year. Because of this, his / her income may be taxed at a higher rate of income tax. Such member of the employee’s family can also claim relief under section 89 as described above.

b) Deduction Under Section 80C
· When income under the five heads of income i.e Income from salary. Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources are added together we get Gross Total Income of the Assessee.
· From the Gross Total Income, an assessee will be entitled to deduction U/S 80C towards the amount invested in LIC policies, provident funds, payment of tuition fees, repayment of housing loans etc. subject to a maximum of Rs. 1,00,000 in a previous year.