Understanding Section 16 of the Income Tax Act for Assessment Year 2021-22

Section 16 of the Income Tax Act, 1961, deals with the computation of income under the head “Salary.” This section is crucial for both employees and employers as it determines the amount of tax that an employee is liable to pay on their salary income. In this blog, we will discuss the key provisions of Section 16 for the Assessment Year 2021-22.

1. Table of Contents

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   Meaning of Salary

Section 16(1) defines salary as the amount received by an individual from an employer in cash, kind, or any other form, including:

a) Basic salary b) Dearness Allowance (DA) c) Commission d) Bonus e) House Rent Allowance (HRA) f) Conveyance Allowance g) Medical Allowance h) Leave Travel Allowance (LTA) i) Employer’s contribution to Provident Fund (PF) j) Gratuity k) Any other allowance or perquisite

2. Standard Deduction

Section 16(ia) allows a standard deduction of Rs. 50,000 from the gross salary income of an individual. This deduction is available to all employees, irrespective of their actual expenses. This deduction is meant to compensate the employees for the expenses incurred in relation to their employment.

3. Entertainment Allowance

Section 16(ii) allows for an entertainment allowance of up to Rs. 5,000 or 1/5th of salary, whichever is less, to be deducted from the gross salary. However, this deduction is only available to government employees and employees of public sector companies.

4. Professional Tax

Section 16(iii) allows for the deduction of professional tax paid by the employee from their gross salary income. However, this deduction is subject to a limit of Rs. 2,500.

5. Perquisites

Section 17 of the Income Tax Act defines perquisites as any benefit or amenity provided by an employer to their employee. Perquisites can be taxable or non-taxable, depending on the nature of the benefit or amenity. Some common taxable perquisites include:

a) Rent-free accommodation b) Interest-free or concessional loans c) Provision of motor vehicles d) Club memberships e) Medical expenses paid by the employer

6. Valuation of Perquisites

Section 17(2) of the Income Tax Act specifies the methods for valuing different perquisites. The value of some perquisites is based on their actual cost, while others are valued based on a prescribed formula.

7. Exemptions from Perquisites

Section 10 of the Income Tax Act provides certain exemptions from taxable perquisites, such as:

a) Value of any medical treatment provided to an employee or their family b) Value of any gift or voucher provided to an employee on certain occasions c) Value of any scholarship or education grant provided to an employee’s child

8. Leave Travel Allowance (LTA)

Section 10(5) of the Income Tax Act allows for an exemption of LTA received by an employee from their employer. This exemption is available twice in a block of four years, and the current block for the years 2018-2021. The exemption is limited to the actual amount spent on travel, subject to certain conditions.

9. Medical Reimbursement

Section 17(2)(v) of the Income Tax Act provides for an exemption of medical reimbursement received by an employee from their employer up to a maximum of Rs. 15,000 in a financial year. However, any amount above this limit is taxable.

10. Pension

Section 16(iaa) allows for a deduction of one-third of the pension received by a taxpayer from their gross salary income. This deduction is subject to a maximum of Rs. 1.5 lakh per annum.

11. Bonus

Section 10(11) of the Income Tax Act provides for an exemption of bonus received by employees of public sector companies, up to a maximum of 20% of their salary.

12. Tax Deducted at Source (TDS)

Employers are required to deduct TDS on salary paid to employees, as per the rates prescribed by the Income Tax Act. TDS is deducted based on the employee’s estimated tax liability for the year, and the tax deducted is credited to the employee’s account with the government.

13. Filing of Income Tax Return

Employees are required to file their income tax return if their total income for the year exceeds the basic exemption limit, which is Rs. 2.5 lakh for individuals below 60 years of age, Rs. 3 lakh for senior citizens aged between 60-80 years, and Rs. 5 lakh for super senior citizens above 80 years of age. The due date for filing income tax returns for the Assessment Year 2021-22 is 31st December 2021, for individuals who are not required to get their accounts audited and 30th November 2021 for individuals who are required to get their accounts audited.

14. Perquisites

Perquisites, also known as perks, are benefits or facilities provided by an employer to an employee in addition to their salary. Examples of perquisites include accommodation, car or other conveyance, club membership, interest-free loans, etc. These perquisites are taxable under Section 17(2) of the Income Tax Act, and their value is calculated based on the rules prescribed by the Act.

15. House Rent Allowance (HRA)

HRA is a common component of salary, which is provided to employees to cover their rental expenses. Section 10(13A) of the Income Tax Act provides for an exemption of HRA received by an employee, subject to certain conditions. The exemption is limited to the least of the following:

• Actual HRA received
• Rent paid minus 10% of basic salary
• 50% of basic salary if the employee resides in metro cities or 40% of basic salary if residing in non-metro cities

Conclusion

In conclusion, Section 16 of the Income Tax Act, 1961, plays a crucial role in determining the taxable income of an individual. It is essential for both employees and employers to be aware of the provisions of this section to ensure compliance with the Income Tax Act. While the standard deduction and exemptions from perquisites provide some relief to employees, it is also crucial to understand the valuation of perquisites and the tax implications of different forms of income under the head “Salary.”

Read more useful content:

• section 145 of income tax act
• section 10e of income tax act
• section 9 of the income tax act
• section 94b of income tax act
• section 206aa of income tax act

Frequently Asked Questions (FAQs)

What is salary income as per Section 16 of the Income Tax Act?
Salary income as per Section 16 of the Income Tax Act includes all payments received by an employee from their employer, including basic salary, allowances, perquisites, and bonuses.

What are the deductions available under Section 16 of the Income Tax Act?
The deductions available under Section 16 of the Income Tax Act include standard deduction, professional tax, entertainment allowance, and pension.

What is the standard deduction under Section 16 of the Income Tax Act?
The standard deduction under Section 16(iia) of the Income Tax Act is Rs. 50,000 for the Assessment Year 2021-22.

Are all allowances exempt from tax?
No, not all allowances are exempt from tax. Only certain allowances, such as HRA and LTA, are exempt from tax up to a certain limit, subject to certain conditions.

What is HRA as per the Income Tax Act?
HRA, or House Rent Allowance, is a component of salary provided to employees to cover their rental expenses. HRA is exempt from tax up to a certain limit, subject to certain conditions.

What is LTA as per the Income Tax Act?
LTA, or Leave Travel Allowance, is a component of salary provided to employees to cover their travel expenses. LTA is exempt from tax up to a certain limit, subject to certain conditions.

What is leave encashment?
Leave encashment refers to the payment made by an employer to an employee for their unutilized leave at the time of retirement, resignation or termination.

Is gratuity taxable under the Income Tax Act?
Gratuity is exempt from tax up to a certain limit under Section 10(10) of the Income Tax Act, subject to certain conditions.

What is professional tax as per the Income Tax Act?
Professional tax is a tax levied by state governments on the income earned by individuals from their profession or employment.

What is Form 16?
Form 16 is a certificate issued by an employer to their employee, providing details of the salary paid to them, the TDS deducted on their salary, and other deductions and exemptions claimed by them during the financial year. Form 16 is required to be issued by the employer to the employee by 15th June of the following financial year.