Standard Deduction for Salaried Individuals

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The Finance Minister, in Budget 2018, has not brought in the much-expected changes in tax slabs. Nor has he touched Section 80C with regard to raising the limits for the individual taxpayers. However, the salaried class still have something to rejoice about after the budget.

He has proposed to reintroduce the ’Standard Deduction’ of Rs 40,000. What is a standard deduction? It is a fixed amount of deduction – in this case, an amount of Rs 40,000 which can be reduced by salaried taxpayers, from their gross salary. Interestingly, the provision of Standard Deduction was earlier available but was abolished in the Finance Act 2005. It is also proposed that this deduction would replace the existing transport allowance of Rs 1600 per month and medical allowance of Rs 15,000 per annum. They are usually deducted from the gross salary and claimed as an exemption. The government has proposed requisite amendments to Section 17(2)(viii) of the Income-tax Act, 1961.

Resultantly, if the standard deduction of Rs 40,000 replaces medical allowance of Rs 15,000 and transport allowance of Rs 1600 per month i.e. 19,200 per annum, the effective additional benefit on account of the standard deduction would be an additional income exemption of Rs 5,800

Let us understand this with a small example:
Particulars Until AY 2018-19 From AY 2019-20
Gross Salary (in Rs.) 5,00, 000 5,00,000
(-) Transport Allowance 19,200 Not Applicable
(-) Medical Allowance 15,000 Not Applicable
(-) Standard Deduction Not Applicable 40,000
Net Salary 4,65,800 4,60,000
From the above, you may note that the taxable salary has come down on account of the standard deduction.

Taxpayers Receiving Pension

In a recent clarification issued by the income tax department, if a taxpayer has received a pension from the former employer, it is taxable under the head ‘Salaries’. Therefore, the taxpayer shall be entitled to claim a standard deduction of Rs. 40,000 or the amount of pension, whichever is less.

Our Take

All said and done, though the impact of this amendment for the salaried may appear to be minimal, employers, with this move, would stand to gain in terms of being spared of a whole lot of administrative efforts in processing medical bills of its employees. Perhaps, that was the intention of the legislature!