Section 16 - Standard Deduction on Salaried Employees

Introduction

Section 16 of the Income Tax Act provides a standard deduction for salaried employees to reduce their taxable income. This deduction is given to compensate for work-related expenses and other costs incurred by employees. For Financial Year 2025-26, the standard deduction limit has been updated to benefit taxpayers. It applies to both government and non-government employees. Understanding Section 16, the standard deduction, and its purpose can help employees reduce their taxable salary and save on income tax. This guide explains the deduction limits, eligibility, and how it impacts your taxable income.

What is Section 16 of the Income-tax Act?

Section 16 is a provision under the Income Tax Act, 1961, that specifies deductions allowed to salaried and pensioned employees. It ensures that employees can claim a fixed deduction from their gross salary to cover expenses incurred during their work

Section 16 mainly provides for three types of deductions:

1. Standard Deduction [Section 16(ia)]: A flat, fixed amount for all salaried individuals and pensioners. This is the most important and common deduction.
2. Deduction for Entertainment Allowance [Section 16(ii)]: This is only available to Central and State Government employees, and it has special rules and limits.
3. Deduction for Professional Tax [Section 16(iii)]: This allows you to deduct any employment tax that your State Government collects from you.

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What is Standard Deduction?

The standard deduction is a flat deduction from the gross salary offered to salaried and pensioned employees. It is available regardless of actual expenses

For the Financial Year 2025-26, the amount of Standard Deduction is fixed at:

• ₹50,000 per year under the Old Tax Regime.
• ₹75,000 per year under the New Tax Regime (the new regime is the default option now)

Deductions under Section 16 for FY-2024-25 and FY-2025-26 under the New Regime

Standard Deduction Amount: The deduction available is ₹75,000. This is a flat, fixed amount that is automatically subtracted from your salary.

Other Section 16 Deductions: The other two deductions under Section 16—Entertainment Allowance and Professional Tax—are NOT allowed if you choose the New Tax Regime.

Default Option: Since the New Regime is the default, your employer will use the ₹75,000 Standard Deduction to calculate the tax (TDS) they deduct from your salary unless you specifically inform them that you want to stick to the Old Regime.

Standard Deduction under Section 16(ia)

Section 16(ia) specifically mentions the standard deduction for salaried employees:

1. Eligibility: Salaried individuals receiving a salary or pension.
2. Deduction Amount: ₹50,000 per financial year.
3. Applicable Income: Deducted from gross salary, including basic, DA, HRA (if any), and other allowances.
4. No Proof Needed: Employees do not have to submit any receipts to claim the deduction.

For the Financial Year 2025-26 (Assessment Year 2026-27):

Tax Regime

Standard Deduction Amount

New Tax Regime (Default)

₹75,000 (This is the increased limit)

Old Tax Regime (Optional)

₹50,000

Purpose of Standard Deduction

The main purpose of the standard deduction is to simplify tax calculations and provide relief for work-related expenses.

1. Offset Work Expenses: Compensates for commuting, uniforms, and minor professional costs.
2. Reduces Taxable Income: Lowers gross salary to arrive at net taxable salary.
3. Easy Filing: Eliminates the need to maintain expense records for small deductions.
4. Fair Taxation: Ensures employees are not taxed heavily on basic work-related costs

Standard Deduction for Senior Citizens

The tax law treats everyone who receives a salary or pension in the same way when it comes to the Standard Deduction, regardless of their age.

It's the same deduction, but it helps pensioners a lot!

1. Who is Eligible: A senior citizen (aged 60 years or above) who receives a pension from their former employer is also considered to have "Income from Salary."

2. The Benefit: Since a pension is taxed under the 'Salaries' head, the senior citizen is fully entitled to claim the Standard Deduction under Section 16(ia).

3. The Amount: The deduction is the same flat amount as for any other salaried person:

   • New Tax Regime: ₹75,000 (This is the likely amount for FY 2025-26 under the default regime).
   • Old Tax Regime: ₹50,000.

4. No Receipts: Just like for a working employee, a pensioner does not need to show any bills to claim this ₹75,000 or ₹50,000 deduction from their annual pension income

How Does the Standard Deduction Reduce Taxable Income?

The standard deduction is directly subtracted from gross salary to calculate taxable income

Calculation Step

Description

Example (A)

Example (B)

Step 1: Gross Salary

This is your total salary for the year, including all basic pay and allowances.

₹8,00,000

₹4,50,000

Step 2: Apply Standard Deduction (Section 16(ia))

This is the fixed, flat amount you can subtract without any proof.

(-) ₹75,000

(-) ₹4,50,000

Step 3: Calculate Taxable Salary

Subtract the deduction from your Gross Salary. This is the amount the tax will be calculated on.

₹7,25,000

₹0

What the Examples Show:

• Example (A): The person's gross salary was ₹8,00,000. After subtracting the ₹75,000 Standard Deduction, their income that the tax office considers has come down to ₹7,25,000. They only pay tax on the lower amount, saving a good amount of money.
• Example (B): If your gross salary is less than the Standard Deduction (e.g., ₹4,50,000), you can deduct the actual salary amount, making your taxable income ₹0. This means you pay no tax on your salary.

Who is Available for Deduction under Section 16(ia)?

1. Salaried Individuals: All employees receiving salary from a registered employer.
2. Government Employees: Central and State government employees are eligible.
3. Pensioners: Individuals receiving a pension from any government or organization.
4. Both Old and New Regime: Deduction is available under the old and new tax regimes, making it universally applicable for salaried taxpayers.

Benefits of Section 16

1. Simplified Filing: Easy to claim a deduction without proof.
2. Reduced Tax Liability: Decreases taxable income automatically.
3. Applicable to Pensioners: Helps retirees reduce taxes on pension income.
4. Standard Deduction is Fixed: Flat deduction of ₹50,000 ensures predictable tax savings.
5. No Documentation Needed: Employees do not need bills or receipts to claim the deduction.

Conclusion

Section 16 provides salaried employees and pensioners with a standard deduction of ₹50,000 for FY 2025-26, simplifying tax calculations and reducing taxable income. It applies under both new and old tax regimes and does not require proof of expenses. This deduction benefits employees by lowering tax liability, providing relief for work-related costs, and making Income Tax Return filing easier. Understanding Section 16 ensures that employees claim the deduction properly and optimize their tax savings.