Section 16 Deductions

Section 16 of the Income Tax Act, 1961 sets out the three deductions available to a salaried taxpayer when computing income under the head “Income from Salaries”. These deductions are applied directly against gross salary before arriving at taxable salary, separate from Chapter VI-A deductions (Sections 80C, 80D, etc.). Section 16 is unusual among salary tax provisions in that it is available under both the old and new tax regimes — most other exemptions and deductions are restricted to the old regime.

Three Components of Section 16

Section 16 has three sub-clauses, each addressing a specific salary-related deduction:

Clause	Deduction	Cap
16(ia)	Standard Deduction	₹50,000 (old regime) / ₹75,000 (new regime)
16(ii)	Entertainment Allowance	Government employees only, max ₹5,000
16(iii)	Professional Tax (employment tax)	Full amount paid, max ₹2,500/year

Section 16(ia) — Standard Deduction

The Standard Deduction is a flat amount allowed to every salaried taxpayer and pensioner, irrespective of actual expenses. It was reintroduced in Budget 2018 at ₹40,000, raised to ₹50,000 from FY 2019-20, and increased to ₹75,000 for the new tax regime in Budget 2024 (applicable from FY 2024-25 onwards). Under the old tax regime, the limit remains at ₹50,000 for FY 2025-26.

Regime	Standard Deduction
Old regime (FY 2025-26)	₹50,000
New regime (FY 2025-26)	₹75,000

The deduction does not require any documentation — no bills, no receipts, no proofs. It is granted automatically by the employer through monthly TDS computation and reflected in Form 16. For pensioners, the same deduction applies against pension income, since pension is taxed under the head “Salaries”. Family pension recipients receive a separate, lower standard deduction under Section 57(iia) — ₹25,000 from FY 2024-25 under the new regime.

Eligibility

• All salaried employees (private and public sector)
• Pensioners receiving pension from a former employer
• Government employees
• Employees of foreign companies working in India

The deduction is not available to:

• Self-employed professionals or business owners
• Family pensioners (they get a separate deduction under Section 57(iia))
• Recipients of casual or one-off payments not in the nature of salary

Section 16(ii) — Entertainment Allowance

This deduction is available only to government employees (Central Government, State Government, or local-authority employees). The deduction is the lowest of:

• ₹5,000
• 20% of basic salary (excluding allowances and perquisites)
• Actual entertainment allowance received

Private-sector employees and PSU employees do not qualify for this deduction even if they receive an entertainment allowance — the entire amount is taxable for them. With most government salaries today designed without a dedicated entertainment allowance, this clause has limited practical impact, but it remains on the statute.

Section 16(iii) — Professional Tax

Professional tax (also called employment tax) is a state-level levy charged on salaries by certain Indian states under Article 276 of the Constitution. The maximum any state can charge per employee per year is ₹2,500. States that levy professional tax include Maharashtra, Karnataka, West Bengal, Tamil Nadu, Andhra Pradesh, Telangana, Gujarat, Madhya Pradesh and Kerala. States like Delhi, Haryana, Uttar Pradesh, Rajasthan and Punjab do not levy professional tax.

The full amount of professional tax actually paid by the employee in the financial year is deductible under Section 16(iii). The deduction:

• Is allowed only on the amount paid, not merely accrued
• Includes professional tax paid by the employee directly (e.g., self-employed professionals filing their own PT)
• Is allowed even if the employer pays PT on the employee’s behalf, in which case the perquisite value is added to salary and the deduction is allowed simultaneously

Since the maximum professional tax in any state is ₹2,500/year, the maximum 16(iii) deduction is also ₹2,500, but the rupee saving — at ₹750 in the 30% slab — adds up over many employees.

Available Under Both Regimes

A noteworthy feature of Section 16 is that it is one of the few provisions still allowed under the new tax regime. Section 115BAC, which governs the new regime, explicitly disallows most Chapter VI-A deductions and salary-related exemptions like HRA and LTA — but it permits:

• Section 16(ia) Standard Deduction (at the higher ₹75,000 cap)
• Section 16(ii) Entertainment Allowance (government employees only)
• Section 16(iii) Professional Tax

This makes Section 16 the floor of relief that every salaried Indian gets, regardless of regime choice. The Budget 2024 increase of the standard deduction to ₹75,000 in the new regime was a deliberate move to make new regime more attractive without disturbing old-regime taxpayers.

Comparison: Old vs New Regime Standard Deduction

Feature	Old Regime	New Regime
Standard Deduction (FY 2025-26)	₹50,000	₹75,000
HRA exemption u/s 10(13A)	Available	Not available
LTA exemption u/s 10(5)	Available	Not available
Section 80C, 80D	Available	Not available
Slab rates	Higher	Lower
Section 87A rebate threshold	₹5 lakh	₹7 lakh

For a junior or mid-level employee with no major rent, no home loan, and limited 80C investments, the new regime’s combination of lower slabs + ₹75,000 standard deduction + ₹7 lakh rebate often wins on tax. For senior employees in metros with significant rent and 80C investments, the old regime’s HRA and Chapter VI-A deductions usually still produce a lower tax bill.

How Omnivoo Helps

Omnivoo applies the correct Section 16 components automatically based on each employee’s regime preference and state of work — ₹75,000 standard deduction for new-regime employees, ₹50,000 for old-regime, plus the actual professional tax paid in the relevant state. Employees see the breakdown clearly on every payslip and on the year-end Form 16, with no manual configuration required by the employer.