Deductions from Salary and Employment Tax: Section 16(3)

When it comes to taxation of salary income in India, employees often look for ways to reduce their taxable income through legal deductions. The Income Tax Act, 1961, provides several such provisions, and among them, Section 16(3) of Income Tax Act, also referred to as Section 16(iii), plays a crucial role. This section deals with deductions from salaries, specifically focusing on employment tax. In simple terms, it allows a deduction of any sum paid by the assessee on account of a tax on employment. The provision recognizes that employees are already contributing to state employment tax and ensures they get relief from double taxation. Alongside this, Section 16 provides three different types of tax deductions on salary income, making it a key area for salaried taxpayers to understand and utilize.

What is Section 16 of Income Tax Act?

Section 16 of the Income Tax Act deals with deductions available to salaried individuals while computing their taxable salary income. It provides three major reliefs to employees. These include:

1. Standard Deduction – A flat deduction allowed to every salaried taxpayer, irrespective of expenses.
2. Entertainment Allowance – Deduction for certain government employees.
3. Employment Tax Deduction under Section 16(3) (or Section 16(iii)) – Relief for employment tax paid to the state government.

Thus, Section 16 provides three different types of tax deductions to salaried individuals, ensuring that the burden of taxation is minimized &  fairness is maintained. Among these, the deduction for employment tax is allowed by Section 16(iii) of Income Tax Act, which we will explore in detail.

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Section 16(3) Explained – Deduction for Employment Tax

Section 16(3) of Income Tax Act deals specifically with employment tax, also known as professional tax. This is a state-level tax imposed on individuals engaged in professions, trades, or employment. It is collected by state governments under the power granted by the Constitution of India.

The provision states that a deduction of any sum paid by the assessee on account of a tax on employment is allowed while computing salary income. This ensures that an employee who pays professional tax does not have to pay income tax on the same portion of income again. In short, it acts as a deduction to bring fairness in the taxation system.

For example, if an employee earns a salary of ₹6,00,000 in a year & pays ₹2,500 as employment tax, then while calculating taxable salary, this ₹2,500 will be deducted under Section 16(iii).

Three Different Types of Deductions under Section 16

Section 16 broadly offers three different types of tax deductions on salary income:

1. Standard Deduction
   • A fixed deduction of ₹50,000 available to all salaried employees.
   • Introduced to replace various allowances & simplify compliance.
2. Entertainment Allowance [Section 16(ii)]
   • Available only for government employees.
   • Maximum deduction is the least of: ₹5,000, 20% of basic salary, or actual allowance received."
3. Employment Tax [Section 16(iii)]
   • Deduction for employment tax (professional tax) actually paid to the state government.
   • Directly reduces salary income.

Thus, Section 16(3) complements the other two deductions by giving specific relief to employees who contribute to state-level professional tax systems.

Also Read: The Standard Deduction for Salaried Individuals

Importance of Section 16(3) – Why This Matters

Professional tax may not be a huge amount compared to income tax, but the principle behind Section 16(3) is vital. It acknowledges that employees should not be doubly taxed. The deduction for employment tax is allowed by Section 16(iii) of Income Tax Act to ensure fairness.

Different states levy different amounts as professional tax. For example, in Maharashtra, the maximum professional tax is ₹2,500 annually, while in some states, it may be lower. Regardless of the amount, the deduction is allowed in full under this section.

For employees, every deduction matters. Even small reliefs can reduce the taxable income & help in efficient tax planning. That is why knowing and claiming deductions from salaries under Section 16 becomes essential.

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Practical Example of Section 16(3) Deduction

Let’s take an example for better clarity:

• Salary Income: ₹7,20,000 per year
• Less: Standard Deduction (₹50,000)
• Less: Entertainment Allowance (₹5,000, applicable to government employees only)
• Less: Employment Tax paid (₹2,500) under Section 16(3)

Taxable Salary Income = ₹6,62,500

As you can see, while ₹2,500 may appear small, every deduction helps lower tax liability, and when combined with standard deduction & other benefits, the relief is substantial.

Common Misconceptions about Section 16(3)

1. Only for Certain Employees – Wrong. Any salaried employee paying professional tax can claim it.
2. Capped at a Certain Limit – Wrong. Whatever employment tax is paid as per state law can be deducted in full.
3. Not Allowed if Employer Pays – Wrong. Even if the employer deducts professional tax from salary and pays to the state, it is still eligible for deduction.

Hence, employees must check their payslips to ensure professional tax is reflected & claimable under Section 16(iii).

Also Read: Deduction for Professional Tax Paid

How to Claim Deduction under Section 16(3)?

• Verify professional tax deduction in your salary slip."
• Ensure your employer has deposited the amount with the state government.
• While filing ITR, claim it under the head “Income from Salary → Deductions under Section 16.”

With proper documentation, the claim becomes simple & straightforward.

Conclusion

Section 16(3) of Income Tax Act is a small but important provision for salaried taxpayers. It ensures that a deduction of any sum paid by the assessee on account of a tax on employment is allowed. By recognizing professional tax as deductible, it prevents double taxation & encourages compliance. Along with the three different types of tax deductions on salary income – standard deduction, entertainment allowance, and employment tax deduction – this section ensures fairness in the taxation system.

For employees, understanding this section means not missing out on legitimate tax relief. For employers, it ensures accurate payroll management.

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