Know about Standard Deductions for salaried individuals

The purpose of standard deviation is to give some parity to salary earners since businesses get the benefit of writing off their eligible business expenses before paying tax on profits.

Dec 17, 2019 02:12 IST India Infoline News Service

Standard deduction for salaried employees had been in existence for a long time in India. The purpose of standard deviation is to give some parity to salary earners since businesses get the benefit of writing off their eligible business expenses before paying tax on profits. The standard deduction was officially abolished in the Union Budget 2005-06 by the then Finance Minister, P Chidambaram. At that point of time, the standard deduction on salary was available up to an outer limit of Rs20,000 for salaried individuals but was subject to income limit of Rs5 lakhs on the upside. Standard deduction was not in existence till the Union Budget 2018, when it was again re-introduced by Arun Jaitley.

Highlights of the new Standard Deduction
When standard deduction was introduced in 2018, it was brought in with the following features.
  • Standard deduction will be available up to an outer limit of Rs40,000 per assessee, irrespective of the income level from financial year 2018-19. From the fiscal year 2019-20, this benefit has been enhanced to Rs50,000 per assessee.
  • Standard deduction will be available in lieu of transport allowance and medical allowance, which stand abolished effective April 2018. These were in the form of reimbursements against actual bills submitted.
  • The abolition of transport allowance (Rs1,200/month) and medical allowance (Rs15,000/year) results in annual loss of Rs34,800. Thus, the net benefit was to the tune of Rs5,800/year, but it saved the hassles of producing bills for reimbursement.
  • The benefit of standard deduction introduced in April 2018 will also be available to pensioners. This is in contrast to the previous standard deduction (prior to 2005), wherein the standard deduction was only available on salary income.
Only incremental benefits on standard deduction
Arun Jaitley introduced Standard Deduction of Rs40,000 in Budget 2018 and it gave the salaried class and the pensioners something to cheer about. However, it replaced annual transport allowance of Rs19,200 and medical reimbursement of Rs15,000. As a result, the effective marginal benefit on account of the standard deduction would be an additional income exemption of Rs5,800 (40,000 – 34,200) for fiscal year 2018-19. With the limit enhanced to Rs50,000 in fiscal 2019-20, the effective additional income exemption now stands enhanced to Rs15,800. The actual benefit will eventually depend on the tax bracket that your income would fall into.

How the standard deduction will impact taxable income?
In Union Budget 2018, the concept of standard deduction at Rs40,000 per year was introduced by the Union Budget. This was in lieu of the transport allowance and medical reimbursement, which offered a combined exemption of Rs34,200/year. This limit of standard deduction stands enhanced to Rs50,000 effective financial year 2019-20. Here is how the numbers will stack up in terms of income exemption implications.

Details Till AY 2018-19 AY 2019-20 AY 2020-21 onwards
Gross Salary Income Rs.9,00,000 Rs.9,00,000 Rs.9,00,000
Transport allowance Rs.19,200 N.A. N.A.
Medical Reimbursement Rs.15,000 N.A. N.A.
Standard Deduction N.A. Rs.40,000 Rs.50,000
Net Salary Income Rs.8,65,800 Rs.8,60,000 Rs.8,50,000
Incremental benefit Base Case Rs.5,800 Rs.15,800
Clearly,  the latest enhanced standard deduction has made a substantive difference to the taxable income. Of course, the eventual benefit will still depend on the tax bracket that the assessee is in. Higher the tax bracket; higher will be the tax benefit.

Net income up to Rs5.50 lakhs now becomes automatically tax-free
The Interim Budget 2019 also introduced an additional benefit in the form of a tax rebate of up to Rs12,500 for all assessees subject to net income not exceeding Rs5 lakhs. When the net income is Rs5 lakhs, the entire tax liability of Rs12,500 is given back to the assessee as rebate. Now comes the standard deduction part. Since the standard deduction of Rs50,000 is an assured deduction, the effective tax-free income becomes Rs5.50 lakhs. Of course, it can be higher if you factor in benefits like Section 80C, Section 24 and Section 80D of the Income Tax Act; but that is a different aspect altogether. What is more important is that this benefit of higher standard deduction is available to salaried employees as well as to retired pensioners under  the new Standard Deduction rules.

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