Standard deduction refers to the non-taxable income percentage that may be made use of to lower your tax burden. The standard deduction is usually taken from gross pay and claimed as an exemption without needing verification of costs. Consequently, a flat sum of Rs 50,000 is deducted from the gross earnings, lowering the individual’s entire taxable income and thereby lowering the taxation bill.
A Standard Deduction is a taxation grant available regardless of the amount of funds or money invested by a person. Standard Deduction in income tax does not require investment proofs, disclosures, or expense bills as it is licensed at a standard rate.
Standard Deduction for Salaried Individuals
The Income Tax Act offers conditions for imposing taxes on citizens’ income and many ways to appropriate deductions and refunds. Standard deduction in income tax is permitted based on the mode the taxpayers expend their earnings.
We have over 80 million taxpayers in India, and the salaried workers and executive personnel comprise the most significant component. With the taxation rates ranging from 0% to 42.7%, salaried executives should claim all standard deductions in income tax to optimize their income.
For the FY that came to an end on March 31, 2022, the tax filers who do not have business income had to file their tax returns on or before July 31, 2022. However, before we analyse the tax deductions and exemptions available, it is essential to note that in case the tax filer opts for the new regime, which offers lower tax rates, especially for employees having taxable earnings below INR 15 lakhs (1.5 million) per annum, they may not be qualified for several deductions or exemptions.
Standard Deduction in case of a New Tax Regime
Individuals and people belonging to the Hindu undivided families can choose the new tax regime section 115BAC of the IT Act, subject to the conditions. The effective tax rates, including cess and surcharge, under the new tax regime are mentioned below and remain unchanged for FY 2021-22 and FY 2022-23:
The basic exemption income slab for a resident individual of 80 years or more and resident individual of the age 60 years or more at any time continues to remain the same, that is, at INR 5,00,000 and INR 3,00,000, respectively.
However, in the case of the new tax regime, certain exemptions or deductions are not available, including –
- Section 10(13A) – House Rent Allowance
- Section 10(5) – Leave Travel Concession.
- Section 10(14) – Covers special allowances detailed in Rule 2BB (such as children’s education allowance, per diem allowance, hostel allowance, transport allowance, Uniform allowance, etc.).
- Section 10(32) – Clubbing benefit of INR 1,500 per minor child
- Section 24(b) – Interest on loan for a self-bought and self-occupied property.
- Section 80CCD (2) offers zero coverage where an employer contributes to the NPS or the National Pension Scheme.
- A standard deduction in income tax is restricted cumulative or aggregate limit during the budget year.
- Standard deduction in income tax is for both salaried and non-salaried persons.
- Standard deduction is additional to other deductions.
- No evidence is required to claim it is a flat deduction.
- The partial standard deduction is allowed in the form of exempt allowances.
- If you are a salaried individual, learn what deductions are available under Section 16 of the Income Tax Act of 1961 and how to take advantage of them to reduce your taxable income and, as a result, your tax burden.
How is Standard Deduction Calculated?
The standard deduction in income tax indicates the portion of income that is not subject to tax that can help reduce your taxation bill. The standard deduction is generally subtracted from the gross salary and claimed as an exemption without having to show any proof of expenses. Hence, this flat amount of INR 50,000 is deducted from the gross salary, which lowers an individual’s overall taxable income, thereby reducing the tax outgo.
What is the Purpose of Standard Deduction?
Salaried taxpayers constitute the majority of the Indian 80 million taxpayers. Consequently, they must carefully examine and claim their exemptions and standard deductions in income tax by sufficiently structuring the revenue, making suitable investments, and fulfilling specified requirements to optimize their taxation outflow.
The intent of introducing standard deduction is:
- To decrease paperwork and permit deductions regardless of the actual expenditures.
- To deliver tax relief to the middle-class salaried people
- To provide advantages to pensioners
The standard deduction decreases a taxpayer’s taxable earnings. Only homes with income exceeding specific thresholds will owe any income taxation.
Did You Know?
154,094,555 returns were filed in FY 2019 to a gross collection of 1,942,182 million dollars.
What is the Impact of Standard Deduction on Pensioners?
The decision to permit standard deduction in income tax provided substantial advantages to pensioners. These pensioners generally do not enjoy any subsidy for transportation and medical expenditures. However, the benefit of the standard deduction for senior citizens is extended to pensioners only if the pension is taxable as salary revenue. If income is from another source, then the advantage of the standard deduction in income tax will not be applicable.
What is the Limit of Standard Deduction?
Standard deduction for senior citizens implies a flat deduction to people earning a pension or a salary. It was introduced in the 2018 Budget in place of the exemption of TA and reimbursement of various medical expenses. In FY 2020-21, the limit of the standard deduction in income tax was INR 50,000.
Word to Remember
Standard salary deduction: This is a cumulative deduction, so if two employers paid you in the same year, the maximum standard deduction would be INR 50000, which is a one-time deduction from an employee’s total compensation for a particular fiscal year. It is unaffected by the number of jobs an employee has.
An Illustration of Standard Deduction
With the standard deduction being INR 50,000, here is an instance of how it helps taxpayers decrease their tax outgo:
|Particulars||Until AY 2018-19||From AY 2020-21|
|Gross salary (Rs)||800000||800000|
|Transport Allowance||19200||Not applicable|
|Medical Allowance||15000||Not applicable|
|Standard Deduction||Not applicable||50000|
How are the Standard Deduction Calculated in the Case of Multiple employers?
Usually, an employee is employed by the employer for a whole fiscal year, so no problem arises in deducting TDS from their salary. In this case, all information relating to the employee’s income is readily known to the employer, and the computation task is easy to handle. However, complications arise when an employee works under two employers. These circumstances may emerge in the following cases:
- The employee switches their job in the middle of the year.
- Where an employee is engaged in a part-time profession or weekend job.
- Where employees operate under two employers simultaneously.
We trust that this blog has clarified what standard deduction in income tax means in India. We have also seen how it helps salaried people save money by lowering their taxable income. The government supports taxpayers to take advantage of such rewards while preparing taxes and reducing their tax burden.
Yes, senior citizens are permitted a standard deduction of INR 50,000 on their pensionable income.
The standard deduction is usually deducted from the gross salary and claimed as an exemption by all the salaried employees regardless of category and need for any investment. It can also be claimed under standard deduction for senior citizens for taxable pensionable income.
The government had proposed amendments to Section 17(2)(viii) of the Income-tax Act, 1961 under the Union Budget 2018.
The standard deduction applies to all classes of employees irrespective of the nature of the employer.
Yes, a standard deduction of INR 50,000 is available for all salaried individuals under the Income Tax Act, 1961, with an upper cap of INR 1,50,000 under section 80C.
Also Read: Do You Need to Pay Surcharge On Income Tax?