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What is Standard Deduction?

In his Budget 2018 speech, Finance Minister Mr. Arun Jaitley proposed to provide (reintroduce) a standard deduction of Rs. 40,000 from salary income to employees. Standard deduction allows salaried individuals to claim a flat deduction from income towards expenses that would be incurred with relation to his or her employment. There is no proof required in order to claim this deduction. Standard deduction was introduced for the salaried taxpayers under Section 16 of the Income Tax Act in the year 1974, but later abolished with effect from Assessment Year 2006-07. This decision to withdraw standard deduction by former Union Minister of Finance P. Chidambaram was taken on the grounds that there laid an equivalent increase in the basic exemption limit and Section 80C deductions.

Standard deduction that was earlier available to salaried individuals is stated in the table below:

SalaryStandard Deduction
For salaried employees who were earning an annual income from Rs. 75,000 to Rs. 5 lakhsAn amount equal to Rs. 30,000 or 40% of the income, whichever was lower.
For salaried employees who were earning more than Rs. 5 lakhs.An amount of Rs. 20,000.

The simplicity in its calculation, was the main advantage of standard deduction. It didn’t require any disclosures to be made or investment proofs to be submitted, and was given as a straight deduction from the income chargeable under the ‘salary’ head. The removal of the deduction essentially meant that those who were salaried incurred the tax on 'Gross Income', while the self-employed, consultants and freelancers paid tax on their 'Net Income'.

Standard Deduction for Salaried Person

Standard deduction for salaried employees made a comeback in Union Budget 2018. The salaried class can now claim a standard deduction of Rs. 40,000 out of their income. This fixed amount of deduction can be reduced by taxpayers from their gross salary. It has been proposed that this deduction would replace the present medical allowance of Rs. 15,000 per annum and transport allowance of Rs. 1,600 per month. These are generally deducted from the gross salary and claimed as an exemption. As a result, the effective added benefit from the standard deduction is an income exemption of Rs. 5,800 (40,000 - (15,000 + 19,200). To understand how this works, consider the below example:

ParticularsFor FY 2017 - 2018For FY 2018 - 2019
Gross SalaryRs. 4,00,000Rs. 4,00,000
* Transport AllowanceRs. 19,200Not Applicable
* Medical AllowanceRs. 15,000Not Applicable
* Standard DeductionNot ApplicableRs. 40,000
Net Taxable IncomeRs. 3,65,800Rs. 3,60,000

As seen from the table above, it can be said that taxable salary has been brought down on account of the standard deduction.

According to tax experts, the step to reintroduce standard deduction has been much-awaited by the salaried individuals in India. It is expected to help bring in parity between those individuals who run a business and those who are salaried.

Taxpayers Receiving Pension

According to the Income Tax Department, taxpayers receiving pension from their ex-employers are eligible to claim standard deduction of Rs. 40,000.

The Central Board of Direct Taxes (CBDT) has released a statement that reads “The pension received by a taxpayer from his former employer is taxable under the head 'salaries'. Accordingly, any taxpayer who is in receipt of pension from his former employer shall be entitled to claim a deduction of Rs 40,000 or the amount of pension, whichever is less, under Section 16 of the (I-T) Act”, according to Indian daily newspaper The Economic Times.

Example of Standard Deduction

To understand how standard deduction affects tax calculation, consider the following example:

ParticularsPresentPost Budget
Basic Salary + Dearness AllowanceRs. 3,10,533Rs. 3,10,533
Conveyance Allowance (non-taxable)Rs. 19,200-
Medical Reimbursement (non-taxable)Rs. 15,000-
Other Taxable AllowanceRs. 1,89,467Rs. 2,23,667
Gross SalaryRs. 5,00,000Rs. 534,200
Standard Deduction-(Rs. 40,000)
Income under the head SalaryRs. 5,00,000Rs. 494,200
Income TaxRs. 12,500Rs. 12,210
Less: Rebate under Section 87A--
Total tax payable after rebateRs. 12,500Rs. 12,210
Surcharge at 10% / 15%--
Total tax payable after surchargeRs. 12,500Rs. 12,210
Education cess at 3% / 4%Rs. 375Rs. 488
Total tax, surcharge and education cessRs. 12,875Rs. 12,698
Tax saving(177)

Source: The Economic Times

FAQs on Standard Deduction

What is the standard deduction for 2018-2019?

Standard deduction allowed from FY 2018-2019 is flat Rs. 40,000.

Is standard deduction applicable to employees of Central or State Government?

Yes. Standard deduction is available to all class of employees.

Is standard deduction applicable to pensioners?

Yes, standard deduction is available to pensioners.

Explain standard deduction with an example?

Standard deduction allows salaried individuals to claim a flat deduction from income towards expenses that would be incurred with relation to his or her employment. Standard deduction for salaried employees made a comeback in Union Budget 2018. The salaried class will now be able to claim a standard deduction of Rs. 40,000 out of their income.

To understand how standard deduction works, consider the data in the following table:

ParticularsFor FY 2017 - 2018For FY 2018 - 2019
Gross SalaryRs. 4,00,000Rs. 4,00,000
* Transport AllowanceRs. 19,200Not Applicable
* Medical AllowanceRs. 15,000Not Applicable
* Standard DeductionNot ApplicableRs. 40,000
Net Taxable IncomeRs. 3,65,800Rs. 3,60,000

What are the documents required to claim standard deduction?

Salaried taxpayers and pensioners do not have to produce any bills or documents to claim standard deduction, which is Rs. 40,000.

What does standard deduction replace?

It has been proposed that standard deduction would subsume the present medical allowance of Rs. 15,000 per annum and transport allowance of Rs. 1,600 per month. As a result, the effective added benefit from the standard deduction is an income exemption of Rs. 5,800 (40,000 - (15,000 + 19,200).

How does standard deduction impact income tax?

Considering that standard deduction will be introduced in lieu of transport allowance and medical reimbursements, the net increase in deduction shall be a maximum of Rs. 5,800.

When was standard deduction first introduced?

Standard deduction was introduced for the salaried taxpayers under Section 16 of the Income Tax Act in the year 1974, but later abolished with effect from Assessment Year 2006-07. Finance Minister Arun Jaitley, in his Budget 2018 speech, proposed to re-introduce standard deduction of flat Rs. 40,000. The deduction that was earlier available is as follows:

SalaryStandard Deduction
For salaried employees who were earning an annual income from Rs. 75,000 to Rs. 5 lakhsAn amount equal to Rs. 30,000 or 40% of the income, whichever was lower.
For salaried employees who were earning more than Rs. 5 lakhs.An amount of Rs. 20,000.

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