How to calculate standard deduction in Income Tax Act?

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What is the Standard Deduction in Income Tax?

The standard deduction is beneficial for 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 19,200 and medical reimbursement of Rs 15,000. 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

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Standard Deduction for Salaried Individuals

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 increase in limit from Rs 40,000 to Rs 50,000 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 2019-20 From AY 2020-21	New Tax Regime (FY 2021-22 and FY 2022-23)	New Tax Regime (FY 2023-24)
Gross Salary (in Rs.)	6,00,000	6,00,000	6,00,000	6,00,000	6,00,000
(-) Transport Allowance	19,200	Not Applicable	Not Applicable	Not Applicable	Not Applicable
(-) Medical Allowance	15,000	Not Applicable	Not Applicable	Not Applicable	Not Applicable
(-) Standard Deduction	Not Applicable	40,000	50,000	Not Applicable	50,000
Net Taxable Salary	5,65,800	5,60,000	5,50,000	6,00,000	5,50,000

Over the 3 financial years the taxable salary before giving effect to further deductions, the net taxable salary has decreased.

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Standard Deduction: New Tax Regime (Budget 2023)

In the Budget of 2020, a revised tax regime was introduced. This new regime provides taxpayers with the choice to pay reduced tax rates. However, significant deductions and exemptions are not applicable under this new system.

Additionally, if a taxpayer opts to file their returns under the new tax regime, the standard deduction permitted from salary income is also not available.

In Budget 2023, the Finance Ministry has reintroduced the Standard Deduction of (INR 50,000).

Particularts	Old Tax regime (FY 2021-22)	New tax regime (FY 2021-22)	New Tax Regime (Budget 2023)
Salary income	5,00,000	5,00,000	5,00,000
Standatd Deduction	(50,000)	N.A	(50,000)
Taxable salary	4,50,000	5,00,000	4,50,000

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
For FY 2023-24 and onwards, the claim is applicable in the new tax regime as well.

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 2022-23 (Old Regime)	FY 2022-23 (New Regime)	FY 2023-24 (New Regime)
Basic Salary + Dearness Allowance	₹7,00,000	₹7,00,000	₹7,00,000
Conveyance Allowance (non-taxable)	₹0	₹0	₹0
Medical Reimbursement (non-taxable)	₹0	₹0	₹0
Other Taxable Allowance	₹1,34,200	₹1,34,200	₹1,34,200
Gross Salary	₹8,34,200	₹8,34,200	₹8,34,200
Standard Deduction	₹50,000	₹0	₹50,000
Total Income	₹7,84,200	₹8,34,200	₹7,84,200
Other Deductions	₹1,00,000	₹0	₹0
Income Chargeable to Tax	₹6,84,200	₹8,34,200	₹7,84,200
Income Tax	₹49,340	₹79,340	₹33,420

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

Learn How to File TDS Return?

Frequently Asked Questions

Can I claim transport allowance and medical allowance as well along with standard deduction?

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

Can I claim a deduction of 50,000 for previous returns also?

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.

What is the standard deduction for 2018-2019?

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.

Is standard deduction applicable to pensioners?

A standard deduction is available to pensioners as well.

Can I claim standard deduction along with Section 80C deductions?

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.

Are Bills Required to Claim Standard Deduction?

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.

Is standard deduction applicable to new tax regime?

Yes, the standard deduction is available to salaried taxpayers in the new tax regime from FY 2023-24.