What is the Standard Deduction in Income Tax?
Income Tax Standard Deduction – Union Budget 2018
In the budget – 2018 our Finance Minister Jaitley introduced Standard Deduction. This standard deduction brings some joy to both the employers and salaried employees. For the employers, it would result in less administrative efforts in the processing of transport and medical bills. For the salaried employees, it would result in lower taxable salary income.
The standard deduction replaced transport allowance of Rs 19200 and medical reimbursement of Rs 15000. The provision for standard deduction was available earlier. However, it was abolished in the Finance Act 2005
Under the Union Budget 2018, the government had proposed amendments to Section 17(2)(viii) of the Income-tax Act, 1961. The net effect of the standard deduction for the salaried taxpayers would be an additional income exemption of Rs 5800.
Earlier the standard deduction was available with few limitations. The following are the details of the standard deduction prior to Budget 2018:
|Salaried Employees Earning||Standard Deduction Allowed|
|Annual income from Rs. 75,000 to Rs 5 lakh||Rs 30000 or 40% of the income, whichever is lower.|
|Annual income greater than Rs 5 lakhs||Rs 20000|
Standard Deduction for Salaried Individuals
Income Tax Standard Deduction – Interim Budget 2019
The standard deduction has replaced the travel allowance and medical reimbursement. This gives the salaried taxpayers an exemption from their taxable income without any restrictions. The interim budget 2019 came up with many benefits for the salaried taxpayers. Among these benefits, one was an increased standard deduction. The standard deduction increased from Rs 40000 to Rs 50000, being a notable move in favor of the salaried taxpayers. This move will help taxpayers lower their taxable income in one go.
Let’s see how it affects the taxable income before and after the standard deduction:
|Particulars||FY 2017-18 AY 2018-19||FY 2018-19AY 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 Salary||5,65,800||5,60,000||5,50,000|
Over the 3 financial years the taxable salary before giving effect to further deductions, the net taxable salary has decreased.
Standard Deduction for taxpayers receiving pension
A clarification was issued by the CBDT clarifying the applicability of standard deduction on pensioners. In the clarification, CBDT mentioned that pension received by a taxpayer from an ex-employer is taxable under the head of ‘Salaries’. Since the pension is taxable as a part of salary income the taxpayer will be entitled to standard deduction under section 16.
- For FY 2018-19, the claim will be Rs 40000 or pension amount whichever is lower
- For FY 2019-20 and onwards, the claim will be Rs 40000 or pension amount whichever is lower
You can refer to the clarification dated 5th April 2018 here
How to calculate standard deduction with example?
Let us understand the effect of standard deduction with an example:
|Particulars||FY 2017-18 AY 2018-19(Rs)||FY 2018-19AY 2019-20(Rs)||From FY 2019-20From AY 2020-21(Rs)|
|Basic Salary + Dearness Allowance||700000||700000||700000|
|Conveyance Allowance (non-taxable)||19200||–||–|
|Medical Reimbursement (non-taxable)||15000||–||–|
|Other Taxable Allowance||100000||134200||134200|
|Income Chargeable to Tax||700000||694200||684200|
|Total Income tax Saving||–||1160||3160|
How to claim the standard deduction?
You can claim a standard deduction while filing your income tax return. Usually, your employer will take your standard deduction into account while calculating your tax payable. This tax payable will help your employer in deducting your TDS.
The last date of filing an income tax return is 31st July of the next year. However, this due date might change and the IT department will always notify the revised due date.
Is standard deduction part of Section 80C?
No, the standard deduction is not a part of section 80C. Both the standard deduction and section 80C cater to different rules and regulations serving different purposes.
A standard deduction is a deduction against medical and travel expenses. While deduction under section 80C allows a deduction for specific investments and expenses. To know more about section 80C
Frequently Asked Questions
No, you can claim the only standard deduction. In fact, the standard deduction is a replacement of transport allowance and medical allowance. Hence, you can claim an only standard deduction from FY 2018-19
No, the standard deduction of Rs 50000 is applicable for the financial year 2019-20 and succeeding financial years. A taxpayer cannot revise his filed income tax return and claim the deduction. Even in case he/she has not yet filed his ITR, he does not have an option to claim the standard deduction.
For the financial year 2018-2019, the standard deduction limit was Rs 40000. However, this limit is not revised to Rs 50000 for the financial year 2019-2020.
A standard deduction is available to pensioners as well.
Yes, you can claim standard deduction along with deduction under section 80C. In fact, there is no restriction or relationship between these deductions. Both are mutually exclusive of each other and have no reference to each other.
Earlier, to claim a deduction you had to submit medical and travel bills. These bills were then reviewed by your employer and deduction was allowed. However, to claim a standard deduction you need not submit any bills. You will receive the deduction by default without any conditions of submitting bills.