Deductions from salary

22 Sep 2022

Let’s First understand what is meant by deductions.

Deductions are those expenses or investments mentioned in “Income Tax Act 1961” which will be subtracted from your gross total income to reduce tax liability.

Deduction u/s 16

1) Standard deduction u/s 16 (ia)-

i) Standard deduction from salary is

allowed up to Rs 50,000 subject to employee’s salary and note the point that you can claim standard deduction only once in a year

ii) E.g. -If you are working with two employers during the one financial year then your standard deduction will be limited to Rs 50,000 only, for both the employers.

2) Entertainment allowance deduction u/s 16 (ii)-

i) Deduction of entertainment allowance is allowed in case of government employees. It is fully taxable for the employees working in the private sector.

ii) 20% (one fifth) of salary or Rs 5,000 whichever is lower is allowed as deduction from salary.

3) Professional Tax u/s 16 (iii)-

i) Taxpayers can claim deduction of professional tax paid from salary.

ii) The deduction will be allowed if professional tax is actually paid in that specific financial year by the employee. The maximum deduction allowed is Rs 2,500 per year.

Leave Travel Allowance (LTA) –

The allowance given for traveling during leaves apart from work is called as LTA

Conditions to claim LTA

Let’s see what are the conditions to claim LTA

i) LTA is allowed for intra-national travels only and not for international traveling.

ii) LTA allowed for actual expenses made for ticket of traveling

iii) Exemption of LTA is allowed to assessee with his family.

  • Here Family includes spouse, children and dependent parents, sister & brother of assessee.

  • If children are born after 1st October 1998 then exemption is restricted upto two children only.

  • Above restriction is not for children born before 1st October 1998. Also multiple births after the first child don’t have this restriction.

iv) The actual fare of bus, rail or air is allowed as an exemption. No other expenses like stay, conveyance, food are allowed.

v) Employee can claim exemption of actual spent subject to LTA received in salary.

E.g - if an employee received LTA in salary Rs 40,000 and his fare of traveling is Rs 50,000 then exemption will be limited to Rs 40,000 only.

  • In another scenario, if an employee received LTA in salary Rs 40,000 and actual expenses are Rs 25,000 then exemption will be limited to Rs 25,000 remaining Rs 15,000 will be taxable as part of salary.

vi) one can’t claim LTA every year or every vacation. It can be claimed only for two journeys in a block of four calendar years.

Children Education Allowance -

The Income Tax Act provides tax exemptions in children education allowance for education purposes.

i) The exemption is allowed Rs 100 per month per child. Allowed for maximum two children.

ii) It is allowed till 12th standard. The age of the child should be less or equal to 20 years.

Hostel Allowance -

The exemption is allowed Rs 300 per month per child. Allowed for maximum two children.

Uniform Allowance -

  • Uniform allowance is an allowance which receives to meet the expenditure incurred on purchase or maintenance of uniform for the work.

  • It is allowed to the extent of actual expenses incurred.

Tribal Area allowance -

  • Receiving special allowance to live in hilly or scheduled areas is known as tribal area allowance.

  • The exemption is allowed up to Rs 200 per month.

Transport Allowance -

  • The exemption of transport allowance for normal employees is not allowed now, it is allowed to handicapped, blind & deaf employees.

  • The exemption is allowed upto Rs 3200 per month.