As part of the Indian Income Tax Act, citizens can pay taxes on their income and claim deductions and rebates. According to the way taxpayers spend their income, deductions are allowed. The standard deduction is one of the deductions available to salaried individuals. Generally, salaried individuals and pensioners can claim a certain amount as a standard deduction without having to invest or spend any money.
Did You Know? The Indian Government reintroduced the provision during the 2018 budget announcement after being taken down for several years.
What is Standard Deduction?
Standard deductions are usually deducted from gross salaries and claimed as an exemption without having to prove expenses. They are flat deductions of ₹50,000 from your taxable income that falls under gross wages. Since its introduction, the standard deduction has provided several tax advantages to salaried individuals.
Purpose of Standard Deductions
Standard deductions are introduced for the following reasons:
- In whatever income tax bracket you are in, the standard deduction reduces your salary by a flat ₹50,000.
- Additionally, salary income qualifies for this deduction.
- There would be no concept of different tax slabs.
- It reduces paperwork and allows deductions regardless of actual expenses.
- It provides tax relief to the middle class.
- It offers many benefits for pensioners.
Also Read: Salary Calculator 2022-23 - Take Home Salary Calculator India
Standard Deduction in the 2018 Budget
In Budget 2018, Finance Minister Jaitley introduced a Standard Deduction of ₹40,000 for salaried employees. There was a reduction of ₹19200 in the transport allowance and ₹15,000 in the medical reimbursement.
Standard deductions are usually deducted from gross pay and claimed as tax exemptions. Salaried employees can claim this deduction regardless of category or need for investment.
Standard Deduction in 2019 Interim Budget
The Indian Government included several tax benefits in the Interim Budget presented on 1st February 2019. A significant change is an addition of ₹10,000 (increased from ₹40,000) to the Standard Deduction. Hence, the standard deduction limit in the interim budget 2019 is set to ₹50,000 maximum.
Standard Deduction in Budget 2020
The Budget 2020 introduced a new tax regime (FY 2020-21) that reduced income tax rates. Taxpayers will have to give up significant tax exemptions and benefits to take advantage of this option.
The below table explains the difference between old and new tax regimes.
|
Particulars |
Old tax regime (FY 2020-21) |
New tax regime (FY 2020-21) |
|
Income from Salary |
₹3,50,000 |
₹3,50,000 |
|
Less: Standard Deduction |
₹50,000 |
Nil |
|
Taxable Salary |
₹3,00,000 |
₹3,50,000 |
Standard Deduction on Union Budget 2022
Salaried individuals and pensioners will not see a change in the standard deduction amount in Budget 2022. Therefore, salaried individuals and pensioners (whose pensions are taxed under the head salary) will continue to be able to claim the same standard deduction in the financial year 2022-23 as they did in the previous year. The standard deduction is ₹50,000 in the financial year 2022-23 if they elect the old tax regime.
Because of the covid-19 pandemic, there was an expectation of a hike in the standard deduction claiming amount. A higher price corresponds to enhanced internet connectivity, a higher mobile/telephone bill, and furniture, among other things.
To simplify employee compliance and reduce documentation, the Union Budget 2018 introduced a standard deduction of ₹40,000 in place of transport allowances of ₹19,200 and medical reimbursements of ₹15,000. You can avail of a standard deduction benefit of a maximum of ₹50,000 from gross salary income. You do not need to submit any bills to your employer. From FY 2019-20, the standard deduction will be ₹50,000.
Interestingly, the Standard Deduction provision was available earlier. It was, however, abolished in the 2005 Finance Act.
It was available until the end of FY 2004-05. The deduction allowed was equal to ₹30,000 rupees or 40% of income, whichever was lower for those earning between ₹75,000 and ₹5 lakhs and ₹20,000 for those earning over ₹5 lakh.
Also Read: What Is A Salary Slip? Why Is It Important? What Is It's Format?
Example of a Standard Deduction on Salary
Let us look at an example for a better understanding:
|
Details of Particulars |
Until AY 2018-19 |
From AY 2019-20 |
From AY 2020-21 |
|
Gross salary (in ₹) |
9,00,000 |
9,00,000 |
9,00,000 |
|
(-) Transport Allowance |
19,200 |
Not Applicable |
Not Applicable |
|
(-) Medical Allowance |
15,000 |
Not Applicable |
Not Applicable |
|
(-) Standard Deviation |
Not Applicable |
40,000 |
50,000 |
|
Net Salary |
8,65,800 |
8,60,000 |
8,50,000 |
As shown above, standard deductions have resulted in a taxable salary reduction.
Standard Deduction for Senior Citizens
- Indian law recognises any resident between 60 and 80 as a senior citizen.
- Pensions are stipends or periodic allowances granted to individuals with past service, particularly senior citizens.
- Senior citizens' pensions from their former employers are taxable under the heading 'salaries' under the Indian Taxation System.
- Section 16 of the IT Act allows pensioners to deduct ₹ 50,000 per annum or the amount of their pension, whichever is less.
- Thus, the reintroduction of standard deductions has eased the financial burden of seniors.
Standard Deduction in Income Tax
Following is a breakdown of a person's salary and tax outgo before standard deductions:
|
Particulars |
Amount before standard deduction (₹) |
|
Basic salary Dearness Allowance |
3,90,000 |
|
Medical reimbursement (non-taxable) |
15,000 |
|
Conveyance Allowance (non-taxable) |
19,200 |
|
Other Taxable Allowance |
1,10,000 |
|
Gross Salary |
5,00,000 |
|
Standard Deduction |
Nil |
|
Income comes under the head salary. |
5,00,000 |
|
Income tax at 5% |
25,000 |
|
(-) Rebate under Section 87A |
Nil |
|
Total tax payable after rebate |
25,000 |
|
Surcharge @10%/15% |
Nil |
|
Total tax payable after surcharge |
25,000 |
|
Health and Education cess @4% |
1000 |
|
Total tax, surcharge and cess |
26,000 |
Below is a table that illustrates how the standard deduction will affect tax calculations in 2022:
|
Particulars |
Amount after the standard deduction (₹) |
|
Basic salary Dearness Allowance |
3,90,000 |
|
Medical reimbursement (non-taxable) |
Nil |
|
Conveyance Allowance (non-taxable) |
Nil |
|
Other Taxable Allowance |
1,10,000 |
|
Gross Salary |
5,00,000 |
|
Standard Deduction |
50,000 |
|
Income comes under the head salary. |
4,50,000 |
|
Income tax at 5% |
22,500 |
|
(-) Rebate under Section 87A |
Nil |
|
Total tax payable after rebate |
22,500 |
|
Surcharge @10%/15% |
Nil |
|
Total tax payable after surcharge |
22,500 |
|
Health and Education cess @4% |
900 |
|
Total tax, surcharge and cess |
23,400 |
As a result, standard deductions enable individuals to save a significant amount on their total taxes. In the above case, the tax savings amount is ₹2,600 (₹26,000-₹23,400).
Also Read: What Is Gross Salary? Know How To Calculate Gross Salary Or CTC
Other Deductions for Salaried Employees
Certain deductions and allowances are available to salaried income under the income tax standard deduction. Employed taxpayers can reduce their taxable income by claiming deductions under Sections 80C, 80D, and 80E. Below is an overview of these sections:
Section 80C
Investments made under this section are eligible for a deduction of up to ₹1,50,000. Any amount paid toward an annuity plan of LIC or another insurer is deductible under Section 80CCC. Section 80CCD (1) allows taxpayers to deduct contributions to pension accounts. In either case, taxpayers have a deduction of 10% of their salary if employed or 20% of their total gross income if they are self-employed, whichever is less.
Section 80D
Individuals can deduct ₹25,000 from their taxes if they ensure themselves, their spouse, or their dependent children under Section 80D. A deduction of ₹25,000 is available for parents' insurance if they are below 60 and ₹50,000 for those over 60.
Section 80E
Under Section 80E, higher education loans are eligible for interest deductions. This taxpayer can have taken out this loan on behalf of their spouse, children, or students (for whom they are legal guardians).
Moreover, Section 80EE allows first-time homeowners to deduct home loan interest. To qualify for this, the home loan must be less than ₹35,000,000, and the property must be less than ₹50,000,000.
Also Read: How To Save Income Tax on Income From Salary For Individuals
Conclusion
There are over ₹80,000000 crores tax filers in India, most of whom are salaried. Salaried tax filers must carefully review and claim the deductions and exemptions available to them by structuring their remuneration, making eligible investments, and completing specified conditions to maximise their tax outflow. Choose the old or new tax regime according to your gross income and investments. It is also necessary to select whether to forego certain exemptions/deductions each financial year to benefit from a new tax regime.
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