written by Khatabook | June 28, 2021

Standard Deduction for Salaried Individuals

The calculation of taxable income for an individual involves a calculation of gross income. Gross income is the total of income under different heads of income. You can reduce the gross income by various deductions and allowances to get the final taxable income. These deductions may be deductions u/s 80C,80D or standard deduction on income from salary or house property. The net income after such deductions is subject to tax as per the respective slab rate applicable to the taxpayer.

The standard deduction on salary was first introduced in 1974.  But the government abolished it in 2005. The government reintroduced it again in the Union budget of 2018. After its reintroduction, the government introduced many benefits for salaried individuals. These include an increase in the benefit of the standard deduction for FY 2021-22. Before discussing the advantages, let's understand what is standard deduction.

What Do You Mean By Standard Deduction?

The standard deduction in India has undergone a lot of changes under the Income-tax of India. From the financial year 2019-20, a salaried individual has been again allowed to claim a standard deduction on his income. This deduction is irrespective of the fact whether he has any expenses or investment. The government extended the benefit of the standard deduction to FY 2021-22.

Earlier, employees could claim travelling and medical bills only after submitting the proof. But for the standard deduction, no submission of evidence of the expenses is required. Not only employees but employers also benefit since they no longer need to process the bills.

Now, there are two types of standard deduction available in India. One is under the head income from house property while the other is under the head income from salaries.

  • When  an individual receives rental income from house property, it comes under Income from House property. The standard deduction for AY 2020-21 under Income from House Property is 30%.
  • However, standard deduction under the head of salaries is a default deduction. You reduce it from the salary income of the individual to lower the taxable amount. Only a salaried individual or an individual claiming the pension can use it. 
  • Every salaried individual can claim the benefit of the standard deduction for FY 2021-22. This move provides significant tax relief to salaried individuals. Let’s understand in detail how the standard deduction u/s 16 (IA) benefits salaried individu als.

The Standard Deduction Under The Income From Salaries

  • Net salary is the total of wages, pension, gratuity, perquisites, commission minus any deductions u/s10 of the Income Tax Act. Section 10 includes allowances like house rent and conveyance.
  • The government reintroduced the  standard deduction from the assessment year 2019-20. Before this, the government had exempted a transport allowance of Rs 19,200 and a medical allowance of Rs 15,000. In the assessment year, 2019-20 salaried individuals could deduct a flat amount of Rs 40,000. But, they could no longer deduct transport and medical allowance. 
  • From the AY 2020-21 onwards, a standard deduction of Rs 50,000 is available to all salaried individuals. Any medical and travel allowances are still non-applicable. 
  • Remember the standard deduction for salary cannot, in any case, exceed the amount of salary. In other words, the maximum amount of the deduction u/s 16 which you can avail is lower of Rs 50,000 or the amount of salary.  

Let’s explain all the changes above through an example.

Also Read: Salary Calculator - Take Home Salary Calculator India

Standard Deduction with an Example

For example, a salaried individual receives a salary of Rs 1,00,000. He is eligible for a Leave travel allowance of Rs 30,000 and a house rent allowance of Rs 40,000. So, now what is the maximum amount of standard deduction in income tax he can avail? 

In this case, this individual’s net salary is Rs 30,000, that is,

Particulars

Amount

Gross Salary

1,00,000

Less:

 

LTA

30,000

HRA

40,000

Net Salary

30,000

 

The standard deduction under section 16(IA)  is lower of Rs 50,000 or the amount of net salary, i.e. Rs 30,000. Hence the maximum amount of standard deduction you can avail of is Rs 30,000. 

Now, let’s see with an example how over these last two years, the changes in the standard deduction regime have benefited the taxpayers.

For example, an individual has a gross salary of Rs 500,000. This Gross salary is the salary after all the allowed exemptions but before any standard deduction u/s 16(IA).

 

Particulars

 Assessment Year 2019-20

 Assessment Year 2020-21

Gross Salary

5,00,000

5,00,000

Less:

   

Travelling Allowance

Not applicable

Not applicable

Medical Allowance

Not applicable

Not applicable

Standard Deduction

40,000

50,000

Taxable Income

4,60,000

4,50,000

 

We can see from the above example how our taxable income has reduced compared to last assessment year. This reduction is due to an increase in the standard deduction to individual taxpayers.

Since 2020, income tax in India has been working on two regimes: old and new tax regimes. In other words, the individual taxpayer has the option to choose between two tax regimes while filing their income tax return. Let's understand the difference between the old and new tax regime.

Also Read: TDS On Salary Under Section 192

Old vs New Tax System 

The standard deduction discussed above is only for the taxpayers who have opted for the old or regular tax regime.

  • Budget 2020 introduced a new income tax regime for salaried taxpayers of the country. It provides relief to the salaried class from the burden of lockdown, loss of jobs, and lower-income. But, they can't avail of the  standard deduction, deductions of professional tax and entertainment allowance on salaries. 
  • If an individual opts for a new tax regime, they can't avail of the salary standard deduction of Rs 50,000. They can't avail of the deductions under section 80C of Rs 150,000 and the deduction of interest upto Rs 200,000 on the self-occupied property.  
  • At the time of filing the return, every salaried individual has the option to choose between the old and new tax system. You can change the option every year. But, they cannot do the same during the financial year, only at the time of filing of return. 
  • Also, the employee has to inform any changes in his choice of the tax system to his employer. 

How Is Standard Deduction Shown In The Income Tax Return?

ITR -1 is the online taxpayer form for salaried individuals. This form is already filled with the details of the individual taxpayer like his name, PAN, Aadhaar number etc. Under this, the salaried individual needs to provide the details of the following information:

  • Gross salary
  • Allowances allowed under section 10 [like Leave travel allowance(LTA), house rent allowance(HRA)]
  • Net salary (Gross salary- allowance under section 10)
  • Deductions under section 16

Once an individual has entered the gross salary and details of exemption under section 10,  the ITR form automatically calculates the net salary.

You can verify all the information in the online form through part B of Form 16. The employee receives Form 16 from the employer. It shows the TDS deducted from the salary income of the employee during the financial year. Form 16 or the TDS certificate provides similar information in a similar format of ITR-1. An individual can use the same for filling his ITR-1. Any exemption or allowance, if applicable to an individual, will reflect in form 16.   

Deduction u/s16 provides deduction from the income which is chargeable to tax under the head "salaries".

Deduction u/s16 include the following:

  • The standard deduction under section 16 (IA)
  • Entertainment allowance (allowances given by the government to their employees)
  • Professional tax (You can claim deduction on any taxes paid to the government)

The form automatically calculates the final tax amount once you enter all the information in Form ITR -1. To ensure the correctness of the amount, an individual can always check the same through form 16. In other words, both forms should match to ensure validity. 

In cases where form 16 does not show any deductions and the employee is eligible to receive the same, he need not worry. In such cases, an employee can provide the details of the deductions applicable to him at the time of filing of return. There is a drop-down menu in the online form. It includes 16 different allowances applicable under form 16. The taxpayer can select the ones applicable to him. 

Also Read: What Is Gross Salary? Know How To Calculate Gross Salary Or CTC

Calculation Of Standard Deduction In The Case Of Multiple Employers

  • There may be cases where an individual receives salaries from more than one employer. Now, can such, salaried individual claim standard deduction twice, one for each salary income? 
  • The answer is NO. You can avail of the standard deduction on salary in respect of total income in each financial year. This deduction may include salary from one employer or more than one. The number of employers does not affect the amount of the standard deduction. 
  • In other words, if an employee receives salaries from more than one employer, even then, the total amount of standard deduction u/s 16(1) he can avail is Rs 50,000. This amount is the maximum limit of the standard deduction for FY 2021-22

The Standard Deduction For Individuals Eligible For Pension

  • We have understood so far how the standard deduction applies to salaried individuals. The CBDT(Central Board of Direct Taxes) has clarified that any pension income from a former employer will also be taxable under salaries.   
  • The employer adds a certain sum of money to the pension fund during your employment. On your retirement, the employer supports you with regular payments.  
  • The amount of standard deduction for pensioners for FY 2020-21 is Rs 50,000 or the amount of pension received, whichever is lower.

Also Read: What Is A Salary Slip? Why Is It Important? What Is It's Format?

Conclusion

We hope the article has helped you in understanding what is standard deduction in India. We have also seen how it benefits the salaried taxpayers in reducing their taxable income. The government encourages taxpayers to use such benefits while doing their tax planning and reducing the tax burden.  

FAQs

Can a self-employed person claim the standard deduction under section 16(IA)?

No, standard deduction sec 16(IA) is only available for salaried individuals and pensioners. Since self-employed persons do not receive any income as the salary, they cannot avail of this benefit.

Can a person claim travelling and medical allowance along with standard deduction?

No, a salaried taxpayer can only claim Rs 50,000 as the standard deduction for FY 2021-22. You can't claim reimbursement for travelling and medical expenses as of now. 

Can an individual avail standard deduction in income tax for 2018 and other previous years also?

No, the government reintroduced standard deduction only from the financial year 2019-20. So you cannot avail it for previous years. 

Does an individual have to submit any proof to claim the standard deduction u/s 16(1)?

No, the standard deduction is a default deduction available to salaried individuals and pensioners. In some online tax tools, the amount of Rs 50,000 is automatically entered in the format.

Can a person claim other income tax deductions with standard deductions?

Yes, an individual can claim other income tax deductions of section 80C,80D etc., along with standard deductions. You can deduct these income tax deductions from the net salary after the standard deduction. 

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