The Income Tax Act is about more than just imposing a tax on people’s incomes. There are a variety of ways (defined under the Income Tax Act) to claim deductions and refunds based on how one spends one money and where it comes from.
The standard deduction is one such deduction available (on Income from Salary and Pension). The provision was removed for a couple of years before being reintroduced at the 2018 Budget presentation.
Here’s everything you need to know about the standard deduction
What is Standard Deduction As per the Income Tax Act?
The standard deduction is a flat deduction of Rs. 50,000/- to your “Income taxable under the head salaries”.
This tax benefit can be claimed irrespective of the actual amount spent on Transport Allowance and Medical Allowance
|Particulars||F.Y. 2018-19||F.Y. 2019-20 & FY 2020-21|
|Standard Deduction in place of A & B||40,000||50,000|
|Net tax benefit (A+B-C)||5,800||15,800|
The standard deduction replaced transport allowance of Rs 19200 and medical reimbursement of Rs 15000. The provision for standard deduction was available earlier. It was, however, repealed by the Finance Act of 2005.
Under the Union Budget 2018, the government had proposed amendments to Section 17(2)(viii) of the Income-tax Act, 1961.
Purpose of Standard deduction:
The purpose of introducing standard deduction is
- To reduce paperwork and allow deduction irrespective of actual expenses.
- To provide tax relief to middle-class salaried individuals
- To provide benefit to pensioners
Standard Deductions impact on Salaried Income:
With the Standard Deduction now at Rs 50,000, taxpayers would be able to save a significant amount of money on their taxes. Let’s look at an example to help you understand:
|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||Not Applicable||Not Applicable|
|(-) Medical Allowance||15,000||Not Applicable||Not Applicable|
|(-) Standard Deduction||Not Applicable||40,000||50,000|
From the above, it is evident that the taxable salary has come down on account of the standard deduction.
Taxpayers Receiving Pension
According to a new clarification from the IRS, if a taxpayer receives a pension from a previous employer, it is taxed under the heading “Salaries.” As a result, the taxpayer is entitled to a standard deduction of Rs. 40,000* or the amount of his or her pension, whichever is lower.
How is the standard deduction calculated in the case of multiple employers?
The standard deduction is not available on the basis of no. of employers. The standard deduction is the overall limit for a whole year rather than on the basis of no. of employers.
What is the new tax regime’s treatment of the standard deduction?
Budget 2020 proposed a new tax system (FY 2020-21) in which income is taxed at a lower rate. To take advantage of this option, the taxpayer will have to give up major tax benefits and benefits, such as the standard deduction. Standard Deduction Impact on Tax on Salary Income
Who are eligible to claim Standard deduction?
This deduction is accessible to everyone salaried persons, even retirees because a pension received from prior employment is deemed income under the Income Tax Act’s “Salary” head. elf-employed individuals including self-employed professionals cannot.
How one can claim Standard deduction?
When submitting your tax return, you can claim the standard deduction. Please keep in mind that the deadline for filing IT returns is usually the 31st of July of the assessment year. This deduction is usually applied automatically by your employer when computing your tax for TDS reasons (tax deducted from source).
For more information or to file your ITR visit All India ITR