Question 2 OR (a)

Deductions from gross salary under section 16 (as set, 1961 Act, AY 2019-20)

4 marks

Time to write: About 8 minutes

From an older CBCS paper

Question

Question 2 OR (a) · 4 marks

Explain the provisions in respect of the deductions admissible under section 16 of the Income Tax Act of 1961 from gross Salary under the head Income from Salaries. 4

Paper note: The as-set version: set and answered under the Income-tax Act, 1961 for assessment year 2019-20 (previous year 2018-19), with the dates as printed.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

8 minfor 4 marks

Read from the question

section 16The section is named: open with what it says, then explain or apply it.

Write it in this order

Read; underline the asks; jot your points 1 min
1 Standard deduction for 2019-20 1½ marks 3 min
2 Entertainment allowance 1½ marks 2 min
3 Tax on employment 1 mark 2 min

123

Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks. End with step 3 in a line or two.

Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

The rule

Income chargeable under the head Salaries is the gross salary (salary, allowances not exempt and perquisites) less the deductions that section 16 allows, and only those. For assessment year 2019-20 there are three.

1. Standard deduction: section 16(ia)

Every assessee with income from salary, or from pension (which is salary under section 17(1)(ii)), gets a flat deduction, with no proof of expenses.
The amount for assessment year 2019-20 is ₹40,000 or the amount of the salary, whichever is less. The clause was inserted with effect from 1 April 2019, so this is the first year it applies; the held text reads ₹50,000, but its footnote shows that this figure replaced ₹40,000 only from 1 April 2020.

2. Entertainment allowance: section 16(ii)

Only an employee of the Government gets this deduction. An entertainment allowance received by any other employee is taxable in full, with nothing deducted.
The allowance is first included in gross salary. Then the deduction is the least of:
- ₹5,000;
- one-fifth of his salary, leaving out any allowance, benefit or other perquisite; and
- the entertainment allowance actually received.
What he actually spends on entertainment does not matter.

3. Tax on employment: section 16(iii)

Professional tax levied by a State under article 276(2) of the Constitution is deducted in the year in which the employee pays it.
If the employer pays it for him, the amount is first added to his salary as a perquisite (his obligation met by the employer, section 17(2)(iv)) and then deducted under this clause.

Example (our own figures)

A State Government officer in Lucknow has basic salary of ₹6,00,000, an entertainment allowance of ₹9,000 and pays professional tax of ₹2,500 in the year 2018-19. Gross salary is ₹6,09,000. The entertainment deduction is the least of ₹5,000, ₹1,20,000 (one-fifth of ₹6,00,000) and ₹9,000, that is ₹5,000. Deductions under section 16: ₹40,000 + ₹5,000 + ₹2,500 = ₹47,500. Income under the head Salaries: ₹5,61,500. A private sector employee with the same figures would get only ₹42,500, since the entertainment deduction is not open to him: ₹5,66,500.

Where the 4 marks sit

#	Component	Marks
1	Standard deduction for 2019-20	1.5
2	Entertainment allowance	1.5
3	Tax on employment	1
	Total	4

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