When it comes to tax savings for salaried individuals, every rupee counts. While most people focus on big deductions like HRA or 80C, they often forget the smaller, automatic ones, like Section 16(iii) of the Income Tax Act.
This little-known section permits the deduction of tax on employment, more commonly known as professional tax. If you’re a salaried employee, chances are this deduction is already being availed through your Form 16. But knowing how it works can still help you understand & optimise your tax planning better.
What is Section 16(iii)?
Section 16 of the Income Tax Act talks about deductions from salary. And clause (iii) of section 16 specifically allows salaried employees to reduce their taxable salary by the amount of professional tax they have paid during the year.
In simpler terms, it allows salaried employees to claim a deduction for the amount of professional tax paid, either by themselves or on their behalf by their employer. “
Professional Tax – A Quick Explainer
Professional tax is a state-level tax levied on employment. Different states charge different amounts, usually ranging between ₹200–₹2,500 annually.
The employer deducts this professional tax from your monthly salary & deposits it with the state government. & the good news? You can claim a deduction of any sum paid by the assessee on account of a tax on employment under Section 16(iii) of the Income Tax Act. “
Conditions to Claim Deduction under Section 16(iii)
You can claim the deduction only if:
- You’re a salaried individual, &
- Professional tax has been paid during the financial year, either by you or by your employer on your behalf.
The deduction is allowed only in the year of payment, not the year it becomes due.
Example:
Let’s say your professional tax is ₹2,400 annually. This amount is deducted in monthly instalments (e.g., ₹200/month). At the end of the financial year, you can claim ₹2,400 as a deduction from your gross salary income.
What if Your Employer Pays It on Your Behalf?
No problem. Even if your professional tax is paid by your employer, you’re still eligible to claim the deduction under Section 16(iii). It will be reflected in your Form 16, under “Deductions from Salary.”
So don’t worry if it doesn’t come out of your bank—if it’s deducted from your CTC, it counts.
Professional Tax vs Income Tax – Know the Difference
Some people confuse professional tax with income tax. Here’s the difference:
|
Particulars |
Professional Tax |
Income Tax |
|
Authority |
State Government |
Central Government Dedication |
|
n allowed under |
Section 16(iii) |
|
|
Maximum limit |
₹2,500 per year (varies by state) |
Based on slab rates |
Remember, professional tax paid by the employer is also considered paid by the employee, making you eligible for this deduction.
Common Questions People Ask:
- Is professional tax compulsory for all salaried people?
Yes, if you’re working in a state where it is applicable. For example, Maharashtra, Karnataka, & West Bengal levy it, but some states do not.
- Can a freelancer claim a deduction under Section 16(iii)?
No, this deduction is only for salaried individuals. Freelancers can’t claim it unless they are also earning salary income & paying professional tax.
- What if I change jobs during the year?
You can still claim the deduction for the total professional tax paid in the financial year, across both jobs.
Real-World Scenario
Let’s say Nisha works in Mumbai & pays ₹2,400 as professional tax. Her total salary income is ₹7,50,000. After claiming standard deduction of ₹50,000 & professional tax under Section 16(iii), her taxable salary becomes ₹6,97,600 (assuming no other deductions). That’s an instant tax saving of ₹624 (for someone in the 26% slab).
Final Thoughts
Section 16(iii) might not be a massive deduction, but it’s one of those small benefits that add up, especially when you combine it with other salary-based deductions. Make sure your employer has correctly accounted for professional tax in your Form 16 & that you don’t miss it while filing your ITR.
If you’re unsure about how to claim such deductions or need assistance with your salary tax planning, our team at Callmyca.com is here to help you file accurately & maximise your savings.
