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Reviewed by Aug 01, 2021| Updated on
The Central Government collects income tax from your taxable income. The taxable income and total income earned for the year are not the same. It is because the government provides for deduction of a portion of the total income earned to arrive at the income that will be taxed. Hence, the taxable income is usually lesser than the total income due to deductions and it ultimately reduces your tax payable. Accordingly, the standard deduction provides a fixed amount of income as a deduction from total income for eligible persons.
Standard Deduction under Income Tax Act refers to a deduction allowed under the head salaries. The previous Union FM Jaitley introduced Standard Deduction of Rs. 40,000 in Budget 2018 that was increased to Rs 50,000 in 2019. It relieved salaried class from the pain of producing necessary proof to claim a deduction of the transport allowance of Rs. 19200 and medical reimbursement of Rs. 15,000 per annum. The provision of Standard Deduction was previously available until the Finance Act 2005 when it was abolished. It is usually deducted from the gross salary and claimed as an exemption. The effective benefit additionally available on account of the standard deduction would be an income exemption of Rs 10,000.
All the taxable salaried people would be eligible for the Standard Deduction irrespective of whether they hold necessary proof of transport bills or medical bills. Thus, the primary intention of tax authorities would be to relieve the employers from the administrative efforts involved in collecting these bills.
The income tax assessee must compute the income chargeable under the head 'Salaries' after allowing Standard Deduction and the deductions available in respect of entertainment allowance or professional tax. Therefore, the Standard Deduction of Rs 50,000 or the amount of salary, whichever is lower, must be provided to the employees.