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.
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|
|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|
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.