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2021

Standard Deduction in case of Income from Salary

Standard Deduction in case of Income from Salary

The Finance Minister Arun Jaitley introduced Standard Deduction of Rs. 40,000 in Budget 2018, giving the salaried class something to rejoice about. It replaced the transport allowance Rs. 19,200 and medical reimbursement of Rs. 15,000 per annum. Interestingly, the provision of Standard Deduction was earlier available. However, it was abolished in the Finance Act 2005. They are usually deducted from the gross salary and claimed as an exemption. The government has proposed requisite amendments to Section 17(2)(viii) of the Income-tax Act, 1961. As a result, the effective additional benefit on account of the standard deduction would be an additional income exemption of Rs 5800.

As per the previous Tax rules that were applicable for FY 2017-18 (AY 2018-19):

• A Salaried individual could claim annual Transport Allowance (conveyance allowance) of up to Rs 19,200 (Rs 1,600 pm) and up to Rs 38,400 (Rs 3,200 pm) by differently-abled persons.
• The Salaried could also claim up to Rs 15,000 (Rs 1,250 pm) medical reimbursement. To claim this, you would have been submitting medical bills to your employer and getting the allowance benefit.
• These allowances are part of Section 10 of the Income Tax Act.
• With effective from FY 2019-20 (AY 2020-21), a standard deduction of Rs 50,000 in lieu of travel and medical allowances has been proposed for salaried employees and pensioners.
• However, the transport allowance at enhanced rate (i.e., Rs 3,200 pm) shall continue to be available to differently-abled persons. Also, other medical reimbursement benefits in case of hospitalization etc., for all employees shall continue.

What is Standard Deduction?

• A Standard Deduction is nothing but a fixed amount of deduction. There are two types of Standard deductions that are now allowed in FY 2019-20 / AY 2020-21.
• An amount of Rs 50,000 which can be reduced by taxpayers receiving salary or pension income, from their gross salary.
• Standard Deduction @ 30% can be reduced from ‘Income from Rent receivables’ under the head ‘Income from House property’ (existing provision).

How to claim Standard Deduction?

• To claim this standard deduction, there is no need to submit any bills to your employer(s) or the IT department.
• As per this new provision, irrespective of amount of taxable salary the assessee will be entitled to get a deduction of Rs.50,000 or taxable salary, whichever is less.
• Thus suppose if a person has worked for few days (or) months and his salary was just Rs 50,000 in current financial year, then he/she will be entitled to a deduction equal to salary being the same amount.
• If his salary is less, say Rs 30,000 the deduction shall be restricted to Rs 30,000. If salary exceeds amount of Rs 50,000, the deduction shall be restricted to Rs 50,000.
• So, ideally your Form-16 will reflect a fixed deduction of up to Rs 50,000 in lieu of Conveyance and Medical allowances w.e.f. AY 2020-21.

Who can claim the Standard Deduction?

• All Salaried employees can claim up to Rs 50,000 as standard deduction.
• The Central Board of Direct Taxes (CBDT) has clarified that the pension received by a taxpayer from his former employer is taxable under the head “Salaries”.
• So, a taxpayer having income chargeable under the head “Salaries” shall be allowed a deduction of Rs 50,000/- or the amount of salary, whichever is less, for computing his/her taxable income.
• However, Family Pension and Annuity (from life insurance company) is considered as ‘income from other sources’, hence SD won’t be applicable. For family pension standard deduction is Rs 15,000.
• No standard deduction is available on annuity you purchase voluntarily from an insurance company.

Standard Deduction – Interim Budget 2019:

• The Interim Budget presented on 1st February 2019 included numerous tax benefits for the salaried and the middle class.
• Among them, an additional amount of Rs. 10,000 to the Standard Deduction is a noteworthy move.
• With the Standard Deduction being Rs 50,000 now, it will help taxpayers immensely to reduce their tax outgo.
• A standard deduction of Rs 50,000 from your salary income can entitle you an additional income exemption of Rs 15,800 (max). Let’s understand this with an example:

Particulars

Until AY 2018-19

From AY 2019-20

From AY 2020-21

Gross Salary (in Rs.)

8,00,000

8,00,000

8,00,000

(-) Transport Allowance

19,200

N/A

N/A

(-) Medical Allowance

15,000

N/A

N/A

(-) Standard Deduction

N/A

40,000

50,000

Net Salary

7,65,800

7,60,000

7,50,000

• From the above, it is evident that the taxable salary has come down on account of the standard deduction.
• So, Rs 50,000 standard deduction can lower your taxable salary income by a maximum of Rs 15,800. Then, what would be the impact on your tax liability? How much you can save in taxes?
• This increase of Rs 10,000 will result in tax savings of Rs 3,120 for individuals in the highest tax bracket of 31.2% excluding surcharge.

Taxpayers Receiving Pension:

• In a recent clarification issued by the income tax department, if a taxpayer has received a pension from the former employer, it is taxable under the head ‘Salaries’.
• Therefore, the taxpayer can claim a standard deduction of Rs. 40,000* or the amount of pension, whichever is less (*Increased to Rs 50,000 for FY 2019-2020(AY 2020-21) through the Interim Budget 2019.).

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