Many individuals lose out on saving a substantial amount of taxes due to their lack of knowledge. It is important to spend some time and understand the nuances to optimize your taxes. This money thus saved can be channelized to meet your long-term goals. Here are some tips on how to use section 16 to save some taxes!
- Tip #1: Standard deduction under Section 16 (IA) from the employee’s salary
If you are a salaried individual, then you are eligible for a standard deduction of up to Rs. 50,000. This amount is deductible from your gross pay unless the gross pay is lower than this amount, in which case the gross pay becomes eligible.
- For example, if your gross pay after allowances such as HRA, LTA, and other allowances stands at Rs. 45,000/-, then you qualify for Rs. 45,000/- of the standard deduction under section 16.
Depending on the tax rate slab you fall into, this item of section 16 could alone help you save a substantial amount of taxes. This is illustrated below for various tax rates :
|Tax rate||Tax savings due to the standard deduction under section 16|
|10%||5000 (10% * 50000)|
|20%||10000 (20% * 50000)|
|30%||15000 (30% * 50000)|
This benefit is extended only to salaried employees and pensioners who receive a pension under the head ‘Salaries’. The benefit is extended to senior citizens as well. This benefit is extended to salaried individuals against medical and transportation expenses. Irrespective of the actual amount spent, this amount can be claimed in full. There is no need to produce any proof or documents. The employer will account for a standard deduction under section 16while computing the tax to be deducted at the source.
Tip #2: Entertainment allowance u/s 16 (ii)
This is applicable only for State Government and Central Government employees. This is applied as the minimum of the following three conditions:
- Rs. 5,000
- 20% of one’s basic pay, excluding perquisites, other benefits, and/or allowances
- The actual amount provided by the employer towards entertainment allowance
- Hence, if the employer extends an entertainment allowance of Rs. 4,000, then the employee becomes eligible for Rs. 4000 under this category. This benefit is not extended to non-Government employees. The employer usually includes this whilst calculating the tax deducted at the source. It will be provisioned for in Form 16 issued at the end of the year.
If the individual can qualify for Rs. 5000 under this category, the tax savings for various tax rate slabs are mentioned below –
|Tax rate||Tax savings due to Entertainment Allowance|
|10%||500 (10% * 5000)|
|20%||1000 (20% * 5000)|
|30%||1500 (30% * 5000)|
The entertainment allowance is independent of actual expenditure by the individuals. There is no need to provide proofs or documents.
- Tip #3: Professional tax or tax on employment u/s 16 (iii)
Professional tax is applicable for anyone employed and earns a salary, professional income, or business income. The category of individuals who come under the purview of professional tax includes salaried employees (Government and non-Government), professional income derived by chartered accountants, doctors, lawyers, etc., business income by sole entrepreneur, partnership firms, companies, etc.
The onus of collecting the professional taxes and remitting with the State authorities falls with the employer. The employer deducts the professional taxes on a monthly basis and pays them to the State authorities. The amount paid can be claimed as a standard deduction under section 16 by individuals.
There are certain categories of individuals who are exempt from payment of professional taxes including, physically disabled people, parents or guardians of disabled children, senior citizens (aged > 65 years), members serving auxiliary forces such as Army, Navy, Air Force, etc.,
- The professional taxes are levied by State Governments under article 276(2) of the Indian constitution.
- The rates applicable for income levels may vary marginally.
- The minimum slab of professional tax is Rs. 110 per annum and it is capped at Rs. 2500 per annum.
- There are few states which charge a higher professional tax in the month of February which is payable by the employer in the month of March.
- This is primarily in the case of Rs. 2500 which needs to be spread across all the months (200*11 + 300*1). The amount and frequency at which it should be charged lies within the jurisdiction of the State.
The amount so paid will be deducted prior to the calculation of income tax. The employer will deduct it from the gross pay while computing the tax deducted at the source. There are no proofs or documents required to be produced in this case. Form 16 will reflect the amount of professional tax deducted to save income taxes. Click here to know more to save taxes.
Section 16 alone enables substantial savings for taxes, these do not require any proof or documents and are often taken care of by the employer. It is always best to be in the know and verify your benefits!