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What is a standard deduction in the Income Tax Act?
Standard deduction is a flat deduction of Rs. 50,000/- to your “Income taxable under the head salaries”. This tax benefit can be claimed irrespective of actual amount spent on
- Transport Allowance and
- Medical Allowance
Let us understand the actual tax benefit given by the standard deduction
| Particulars | F.Y. 2018-19 | F.Y. 2019-20 & FY 2020-21* |
|---|---|---|
| Transport Allowance | 19,200 | 19,200 |
| Medical Allowance | 15,000 | 15,000 |
| Standard Deduction in place of A & B | 40,000 | 50,000 |
| Net tax benefit (A+B-C) | 5,800 | 15,800 |
*From FY 2020-21 (AY 2021-22) the deduction can only be claimed by an individual if he opts for the old tax regime. Compare your tax liability under the old and new tax regime.
What is its purpose?
The purpose of introducing standard deduction is
- To reduce paperwork and allow deduction irrespective of actual expenses.
- To provide tax relief to middle class salaried individuals
- To provide benefit to pensioners
What is the impact of standard deduction on tax for salaried individuals?
Introduction of standard deduction helped middle class employees more in terms of reduction in their tax liability. The overall extra deduction benefit was of Rs. 5,800 (Rs. 15,800/- for FY 2019-20). Given below is the complete calculation of tax impact due to standard deduction
Standard Deduction Impact on Tax on Salary Income
| Particulars | F.Y. 2019-20 & F.Y. 2020-21 (old regime) | F.Y. 2018-19 | |
|---|---|---|---|
| Gross salary | 9,00,000 | 9,00,000 | |
| Less : HRA exemption | 60,000 | 60,000 | |
| Less : LTA exemption | 85,000 | 85,000 | |
| Less : Transport Allowance | - | - | |
| Less : Medical Allowance | - | - | |
| Less :- Other exemption | 20,000 | 20,000 | |
| Net Salary(A) | 7,35,000 | 7,35,000 | |
| Less : Standard Deduction(B) | 50,000 | 40,000 | |
| Taxable salary(C)=(A)-(B) | 6,85,000 | 6,95,000 | |
| Income Tax on (C) | 49,500 | 51,500 | |
| Add : Cess @ 4% | 1,980 | 2,060 | |
| Total tax | 51,480 | 53,560 | |
| Tax saving compared with FY 18-19 | 2,080 |
What is the Impact of standard deduction on Pensioners?
This decision to allow standard deduction significantly provides benefits to the pensioners, who normally do not enjoy any allowance on account of transport and medical expenses. Further, the benefit of standard deduction will be allowed to pensioners only if it is taxable as salary income.In case it is charged to tax as other source income then the benefit of standard deduction will not be available.
What is the limit of standard deduction?
The amount of standard deduction cannot exceed the salary amount. The maximum amount of deduction will be Rs. 50,000/- or Salary amount whichever is lower.
Example of the standard deduction from salary
Given below are salary details for FY 2019-20
| Particulars | Amount |
|---|---|
| Gross Salary | 3,50,000 |
| HRA exemption | 80,000 |
| LTA exemption | 1,10,000 |
| Other exemption | 1,30,000 |
| Net Salary | 30,000 |
| Standard Deduction Rs. 50,000 or Amount of salary i.e. 30,000 (lower of both) |
30,000 |
How is the standard deduction calculated in the case of multiple employers?
Standard deduction is not available on the basis of no. of employers. The standard deduction is the overall limit for a whole year rather than on the basis of no. of employers.
Let’s say Mr. A worked for 2 employers during the FY 2019-20. In that case, you may come up with a doubt that how much amount of standard deduction Mr. A can claim
Option 1 Rs. 50,000
Option 2 Rs. 1,00,000 (Rs. 50,000 for each employer)
Mr. A can take benefit of standard deduction upto Rs. 50,000/-
What is the treatment of standard deduction under New Tax Regime?
Budget 2020 has introduced a new tax regime (FY 2020-21) under which income would be taxable at lower rates. To avail this option the taxpayer will have to forego major tax exemptions and benefits including standard deduction.
Standard Deduction Impact on Tax on Salary Income
| Particulars | FY 2020-21 (Old Tax Regime) | FY 2020-21 (New Tax Regime) |
|---|---|---|
| Income from Salary | 3,50,000 | 3,50,000 |
| Less: Standard Deduction | 50,000 | - |
| Taxable Salary | 3,00,000 | 3,50,000 |
Frequently Asked Questions
Q- Is standard deduction available to senior citizens also ?
Yes, standard deduction is available to all salaried taxpayers & pensioners irrespective of their age.
Q- Can I claim the standard deduction even if my income is more than Rs 5,00,000?
The standard deduction is available irrespective of your income tax slab. The benefit would be given to you if you have salary income. The amount of salary is irrelevant in this case.
Q- Do I need to submit proof to claim standard deduction under Income Tax?
Standard deduction is a flat deduction for which no proof is required to be furnished by an employee to the employer/IT Department.
Q- How standard deduction is different from income tax deductions?
Income tax deduction generally means deduction u/s 80C , 80D , etc.
| Standard Deduction | Chapter VI-A Deduction like section 80C, 80D,etc. |
|---|---|
| It is a flat deduction irrespective of actual expenditure. | These deductions are available on the basis of actual expenditure/investment. |
| This deduction is available only to individuals having income from salary. | These deductions are available from all sources of Income. |
| This deduction is allowed from salary income before arriving at Gross Total Income. | These deductions are allowed after calculating Gross Total Income. |
| The limit of standard deduction is Rs. 50,000/- ( Rs. 40,000 for FY 2018-19) | Limit of deduction varies from section to section. Like u/s 80C limit is Rs. 1,50,000 |
Q- Can an employee claim both standard deduction & income tax deduction?
Yes, an employee can claim both standard deductions & income tax deductions.
Q- Which section of the Income Tax Act covers standard deduction?
Section 16(ia) of the Income Tax Act deals with the standard deduction.
Q- Whether the standard deduction is calculated monthly?
Standard deduction is not calculated monthly. A flat deduction is allowed for a whole year.
Q- Is standard deduction available for self-employed in India?
Self-employed people don’t get salary income. They are having a business income. Hence, standard deduction cannot be claimed by the self-employed individuals since the standard deduction is available from salary income only.
Q- Is standard deduction applicable to employees of Central or State Government?
Yes, the standard deduction is available to central or state government employees,
Q- Is standard deductions of Rs 50,000 under section 16 applicable to a person whose only source of income is interest from FDs?
No, Standard deduction is only available from salary & pension income and not on Income from other sources.
Q- Is a standard deduction component mandatory to build a pay scale? I don't have one in my salary structure. Who defines it and how do I get it added to avail tax exemption?
To claim the benefit of standard deduction it is not mandatory to have it mentioned in your pay scale or payslip. You can directly take the benefit at the time of filing ITR.The benefit of standard deduction is also available in Form-16.
Q- My payslip says that I have deductions u/s (10) and (17), amounting to INR 87168. What does this mean?
This means you are eligible to claim exemption of the same from your salary income in respect of various allowances and perquisites, etc.
Q- How do I claim deductions not accounted for by the employer in Form-16 ?
You can claim deductions at the time of return filing if the same is not accounted for by the employer, provided you are eligible to claim the deduction.
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