Introduction
A Standard Deduction for salaried individuals was re-introduced for the year 2018-19 and onwards. The standard deduction for salary income in India was abolished in the Finance Act of 2005-06. At that time, the standard deduction was removed as part of the government's efforts to simplify the tax structure. It remained absent for several years until its reintroduction in the Union Budget of 2018-19 by the then Finance Minister, Mr Arun Jaitley.
It was re-introduced at Rs 40,000 under Section 16 of the Income Tax Act. This was increased to a flat Rs 50,000 in FY19-20 (from AY2020-21).
The standard deduction is provided to offer relief to salaried individuals from the tax burden.
A crucial update in this matter was made in the Union Budget 2023, where the Standard Deduction of Rs 50,000 on Salary Income was also made available to those individuals opting for the New Regime of Taxation. This move was done to ensure parity of Income Tax Calculation under both regimes.
Things to know
- Amount of Deduction: Rs 50,000 from AY 2020-21.
- Applicability: The Standard Deduction is available to all who earn income under the head 'Salaries' in the Income Tax Computation. It's important to note that the standard deduction is a flat deduction available to all salaried individuals, and it aims to simplify the tax filing process by providing a standard amount of deduction without the need for specific expense proofs.
- Pensioners: The government has clarified that the Standard Deduction is available to those who earn Salary income by way of Pension.
- Family Pension Income: For Family Pension Income recipients the Deduction is not as per Section 16, but as follows:
- Section 57(iia) allows a deduction of one-third of the family pension received or Rs. 15,000, whichever is less.
- This deduction is available to the individual who receives the family pension.
- When to claim: The Standard Deduction is to be claimed under the Salary Head and reduced from the Gross Salary to arrive at the Net Taxable Salary.
- Exclusions: When opting for the standard deduction for salary income in India, certain other deductions that were previously available cannot be claimed. Here are the deductions that are not available if you choose the standard deduction:
- Transport Allowance: The standard deduction replaced the earlier provision of transport allowance, which was available up to a certain limit.
- Medical Reimbursement: Before the reintroduction of the standard deduction, employees could claim medical reimbursement as a deduction. However, this is no longer available separately when the standard deduction is chosen.
Due to Standard Deduction, the time and effort invested in the processing of medical bills for reimbursement has been saved.
Examples of Standard Deduction for Salaried Individuals for FY 23-24
Let us take an example to illustrate the workings of Section 16 Standard Deduction during Salary Computation:
|
Particulars |
Before Standard Deduction re-introduction |
Old Regime |
Before Standard Deduction re-introduction |
New Regime |
|
Gross Salary |
16,00,000 |
16,00,000 |
16,00,000 |
16,00,000 |
|
Less: Standard Deduction |
N.A |
(50,000) |
N.A |
(50,000) |
|
Less: Other Deductions like HRA etc. |
(75,000) |
(75,000) |
N.A |
N.A |
|
Taxable Salary |
15,25,000 |
14,75,000 |
16,00,000 |
15,50,000 |
|
Less: Chapter VIA Deductions like 80C etc. |
(1,50,000) |
(1,50,000) |
N.A |
N.A |
|
Net Taxable Income |
13,75,000 |
13,25,000 |
16,00,000 |
15,50,000 |
|
Tax as per slab rates (before cess) |
2,25,000 |
2,10,000 |
1,80,000 |
1,65,000 |
Therefore, using the above example, we can see the tax saving of Rs 15,000 due to the flat deduction of Rs 50,000 under both regimes.
To know more about the tax on salary income calculations done above - Click here
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