The Income Tax Act has provisions for imposing taxes on an individual’s income and also allows various mediums to claim deductions and rebates. Deductions can be claimed depending on the way the taxpayers spend their earnings. For salaried individuals, there is a provision for claiming standard deduction. By default, salaried individuals and pensioners can claim a certain amount as a standard deduction without making any investment or spending money. This provision was removed for a few years and re-introduced in the Budget announcement of 2018.
Here, we will discuss in detail about standard deduction for salaried individuals and how it impacts income tax.
What is standard deduction?
The provision of a standard deduction for both salaried employees refers to a flat deduction of Rs. 50,000 on taxable income. It offers tax relief to select individual taxpayers. Prior to Budget 2018, salaried individuals were allowed to claim reimbursement for travel expenses of maximum Rs. 19,200 and medical expenses of maximum Rs. 15,000.
Budget 2018 replaced these net claims of Rs. 34,200 with a standard deduction of Rs. 40,000 annually. This amount subsequently increased to Rs. 50,000 in Interim Budget 2019.
Why is standard deduction needed?
The main purpose of Standard Deduction is to bring parity between tax liabilities and benefits offered to salaried employees and self-employed individuals. Self-employed individuals enjoy the benefit of claiming various business-related expenses as deductions to bring down tax liabilities.
Salaried individuals, however, do not enjoy such benefits. Therefore, standard deduction was introduced to allow additional tax benefits to salaried individuals from the earlier limit of Rs. 34,200 (meant for travel and medical reimbursements) to Rs. 50,000. This benefit can be availed by all salaried individuals and pensioners, no matter the level of their annual income. Further, they need not submit bills for the expenses being claimed under this benefit.
Eligibility to claim standard deduction
All salaried individuals can claim standard deduction. Pensioners too can claim standard deduction since pension received from a previous employer is considered as income under the category “Salary” as per the Income Tax Act.
How does standard deduction work?
Salaried individuals can claim a standard deduction of up to Rs. 50,000 on their income.
Pensioners can claim standard deduction of maximum Rs. 50,000 or their net annual pension as standard deduction, whichever is lower.
Here, we will explain with the help of an example, how one can calculate and know the tax outgo before and after standard deduction:
Suppose, Mr Ashish has a taxable income of Rs. 6 lakhs in a financial year.
- Before Standard Deduction –
Total tax liability for Mr. Ashish before standard deduction will be Rs. 32,500.
Calculation as per the current income tax slab rates:
- Tax on up to Rs. 2.5 lakhs income = Nil
- Tax on income slab Rs. 2.5 lakhs to Rs. 5 lakh at 5% = Rs. 12,500
- Tax on the remaining Rs. 1 lakh of his income at 20% = Rs. 20,000
- After Standard Deduction –
If Mr. Ashish claims standard deduction, his total taxable income is reduced to Rs. 5.5 lakhs and the total tax outgo reduces to Rs. 22,500.
Calculation as per the current income tax slab rates:
- Tax on Rs. 2.5 lakhs from total income = Nil
- Tax on next Rs. 2.5 lakhs from his income at 5% = Rs. 12,500
- Tax on the remaining Rs. 50,000 at 20% = Rs. 10,000
This example shows that the standard deduction provision allows Mr. Ashish to save Rs. 10,000 on total tax outgo.
Impact of standard deduction on salaried individuals
As discussed above, the standard deduction has replaced travel allowance and medical reimbursement. Thus, salaried individuals can avail an exemption from their taxable income without any restrictions. Among the benefits announced in the interim budget 2019, one was an increased standard deduction for salaried individuals. The standard deduction was increased from Rs. 40,000 to Rs. 50,000. This is intended to help taxpayers lower their taxable income.
Here is how it affects the taxable income before and after the standard deduction:
|Particulars||FY 2017-18 AY 2018-19||FY 2018-19 AY 2019-20||From FY 2019-20From AY 2020-21|
|Gross Salary (in Rs.)||6,00,000||6,00,000||6,00,000|
|(-) Transport Allowance||19,200||Not Applicable||Not Applicable|
|(-) Medical Allowance||15,000||Not Applicable||Not Applicable|
|(-) Standard Deduction||Not Applicable||40,000||50,000|
|Net taxable income||5,65,800||5,60,000||5,50,000|
How is standard deduction calculated in case of multiple employers in one year?
The standard deduction can be availed as a flat deduction from the total income earned by an employee in a particular financial year. It is irrespective of the number of jobs changed within a year by an employee. Thus, one flat deduction is applicable for the cumulative salary earned from all the employers in a financial year.
Salaried individuals can claim a standard deduction while filing income tax returns. Usually, employers consider standard deduction while calculating an employee’s tax payable. This helps employers in arriving at the deduction of TDS.
The last date of filing income tax return is 30th September 2021, extended from the standard deadline of July 31 every year, due to the ongoing Covid-19 pandemic. This due date may change as per any further announcement by the IT department.
- Are all allowances taxable for salaried individuals?
The nature of the allowance determines if it is taxable or not. Generally, allowances that are part of the salary break-up are partially tax-exempt. Certain allowances like City Compensatory Allowance, Special Allowance, and Overtime Allowance are taxable in the hands of the employee.
- Is there an income limit for standard deduction?
The standard deduction can be availed by most taxpayers who aren’t dependents. This is applicable irrespective of how much money they earn during a financial year. There’s no income cap applicable to standard deductions.
- Can standard deduction be claimed along with other deductions?
Yes, an individual can claim other deductions that are available under tax-saving investments like Section 80C (PPF, ELSS Funds etc), Section 80U and their sub-sections along with standard deduction.
- Can an employee claim both standard deduction & income tax deduction?
Yes, an employee can claim both standard deductions & income tax deductions.
- Is standard deduction applicable to employees of the Central or State Government?
Yes, the standard deduction is also available to central or state government employees.