Deduction U/s 16 and Relief U/s 89 from Salary Income

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1. Deduction from Salary Income (Section 16)

The income chargeable under the head “Salaries” is computed after making the following deductions under Section 16 :

  1. Standard Deduction ;
  2. Entertainment Allowance Deduction ; and
  3. Professional Tax .

(1). Standard Deduction [Sec. 16(i)/(ia)] –

  • Standard deduction is Rs. 50,000 ( Rs. 40,000 for A.Y. 2019-20) ; or
  • the Amount of Salary,

whichever is Lower.

(2). Entertainment Allowance [Sec. 16(ii)]-

Entertainment allowance is first included in salary income under the head “Salaries” and thereafter a deduction is given on the basis enumerated in the following paragraphs:

(A). In the case of a Government employee (i.e., a Central Government or a State Government employee), the least of the following is Deductible:

  1. Rs. 5,000;
  2. 20 % of Basic Salary; or
  3. Amount of Entertainment Allowance granted during the previous year.

In order to determine amount of entertainment allowance deductible from salary, the following points need consideration:

  1. For this purpose “salary” excludes any allowance, benefit or other perquisites.
  2. Amount actually expended towards entertainment (out of entertainment allowance received) is not taken into consideration.

(B). In the case of a Non-Government Employee (including employees of Statutory Corporation and Local Authority), :

Entertainment Allowance is NOT deductible.

(3). Professional Tax or Tax on Employment [Sec. 16(iii)] –

Professional Tax or Tax on Employment, levied by a State under article 276 of the Constitution, is Allowed as Deduction.

The following points should be kept in view —

  1. Deduction is available only in the year in which professional tax is paid.
  2. If the professional tax is paid by the employer on behalf of an employee, it is first included in the salary of the employee as a “perquisite” and then the same amount is allowed as deduction on account of “professional tax” from gross salary.
  3. There is no monetary ceiling under the Income-tax Act. Under article 276 of the Constitution, a State Government cannot impose more than Rs. 2,500 per annum as professional tax. Under the Income-tax Act, whatever professional tax is paid during the previous year, is deductible.

Example :

Suppose X, posted in Hyderabad, is required to pay Rs. 2,000 every year as professional tax. On May 31, 2019, he pays Rs. 4,000 on account of professional tax (i.e., Rs. 2,000 for the year 2018-19 and Rs. 2,000 for the year 2019-20). In this case, Rs. 4,000 is deductible for the previous year 2019-20 (it is incorrect to state that in such a case only Rs. 2,500 is deductible).

2. Rebate of maximum ₹12,500 for resident individuals having total income up to ₹5,00,000 [Section 87A]

With a view to provide tax relief to the individual tax payers who are in lower income bracket, the Act for  assessment year 2020-21 has provided rebate from the tax payable by an assessee, if the following condition and  satisfied: 

(1) The assessee is an individual 

(2) He is resident in India, 

(3) His total income does not exceed ₹5,00,000. 

Quantum of rebate:

The rebate shall be equal to: 

(1) the amount of income-tax payable on the total income for any assessment year or 

(2) ₹12,500, 

whichever is less.

3. Relief when Salary is paid in Arrear or in Advance, etc. [Section 89 / Rule 21A]

Where, by reason of any portion of an assessee’s salary being paid in arrears or in advance or by reason of his having received in any one financial year salary for more than twelve months or a payment which under the provisions of section 17(3) is a profit in lieu of salary, his income is assessed at a rate higher than that at which it would otherwise have been assessed, the relief to be granted under section 89 shall be as under:

(A) Where any portion of the Assessee’s Salary is Received in Arrears or in Advance.

Step 1: Calculate the Tax Payable of the Previous Year in which the Arrears/ Advance Salary is Received on:

  1. Total Income inclusive of additional salary.
  2. Total Income exclusive of additional salary.

The difference between (a) and (b) is the tax on additional salary included in the total income.

Step 2: Calculate the Tax Payable of every Previous Year to which the Additional Salary relates :

  1. on total income including additional salary of that particular previous year.
  2. on total income excluding additional salary.

Calculate the difference between (a) and (b) for every previous year to which the additional salary relates and aggregate the same.

Step 3: The Excess between the Tax on Additional Salary as calculated under Step 1 and 2 shall be the Relief Admissible under Section 89.

If there is no excess, no relief is admissible. If the tax calculated in step 1 is less than tax calculated in step 2, the assessee need not apply for relief.

Example :

X is employed by A Ltd. For the previous year 2007-08 his taxable salary income is Rs. 2,30,000 (he has no other income). On Rs. 2,30,000, X has paid income-tax of Rs. 20,600. For the previous year 2018-19, his taxable income (after standard deduction) is Rs. 12,00,000.

Besides, on December 1, 2018, X has received arrears of bonus of Rs. 60,000 pertaining to the previous year 2007-08. This amount was not taxed in the previous year 2007-08, as there was a dispute with the management about calculation of bonus. In this case, Rs. 60,000 will be taxable along with Rs. 12,00,000 for the previous year 2018-19.

X can claim relief under section 89 in respect of arrears of bonus of Rs. 60,000 as follows –

  Previous Year 2007-08Previous Year 2007-08
Taxable income without including arrears of bonus (1)(2)
Tax on above income (including Education Cess)(A)20,6001,79,400
Taxable income after including Arrears of Bonus of Rs. 60,000 2,90,00012,60,000
Tax on above income (including Education Cess)(B)37,0801,98,120
Difference between (B) and (A) [ i.e. (B)-(A) ](C)16,48018,720
  • In this case, relief under section 89 will be Rs. 2,240 (i.e., Rs. 18,720 – Rs. 16,480).
  • If (C)(2) is less than (C)(1), relief under section 89 is not available.

(B) Where the payment is in the nature of gratuity other than exempt under section 10(10) [Rule 21A(3)]: 

Relief is available only if the gratuity is received in respect of past services of the assessee extended over  a period of not less than five years. In other words, no relief is admissible if the period of service is less  than five years.

The amount of relief is calculated as under: 

(a) Where gratuity is paid in respect of past services of fifteen years or more 

Step 1 :

Calculate the tax on total income (including gratuity) in the year of receipt of gratuity and  calculate the average rate of tax i.e. 

[ Total Tax  / Total Income x 100  ]

Step 2:

Calculate the tax on gratuity on basis of average rate of tax computed in step 1. 

Step 3:

Calculate the tax liability by adding 1/3 of the gratuity to the total income of each of the  preceding three years and calculate the average rate of tax for each year separately. 

Step 4:

Calculate the average of the three average rates computed in step 3 above and compute the  tax on gratuity at that average rate. 

Step 5:

The excess, if any, of the tax on gratuity computed at step 2 over step 4 will be the relief  admissible under section 89 

(b) Where gratuity is paid in respect of past services of 5 years or more but less than 15 years. 

The procedure for computation of relief is same except that in step 3 the number of years for  calculating average rate of tax shall be taken as 2 instead of 3 and thus 1/2 of the gratuity will be  added in the total income of the preceding 2 years instead of 3 years. 

(C) Where the payment is in the nature of taxable compensation received from the employer or former  employer at or in connection with the termination of his employment [Rule 21A(4)]:

Relief will be  available only if the following conditions are satisfied: 

(a) Compensation is received after continuous services of not less than 3 years. 

(b) The unexpired portion of the term of employment is also not less than 3 years. 

The procedure for calculating the relief is same as given in Case (a), above, i.e. gratuity paid to the  employee in respect of services rendered for a period of 15 years or more. 

(D) Where payment is for commutation of pension [Rule 21A(5)] 

The procedure for calculating the relief is same as given in case (a) of para (B) i.e. gratuity paid to the  employee in respect of services rendered for a period of 15 years or more. 

(E) Where the payment is of a nature other than given under Rule 21A(2) to 21A(5) discussed above [Rule  21A(6)] 

In these cases, the CBDT may, having regard to the circumstances of each case, allow such relief as it  deems fit. 

Furnishing of particulars for claiming relief under section 89 [Rule 21AA]:

Where the assessee, being a  Government servant or an employee in a company, co-operative society, local authority, university, institution,  association or body, is entitled to relief under section 89, he may furnish to the person responsible for making the  payment referred to in section 192(1) the particulars specified in Form No. 10E.  In case of other employees, the application for the grant of relief shall have to made to the Assessing Officer,  instead of the employer.





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