Standard deductions are a convenient method for reducing the income tax burden without complications. Until 2018, there was no provision for a standard deduction (previously abolished in 2005), so employees would get transport allowance and medical reimbursement (a total of around Rs. 34,200).
It was in the 2018–19 budget session that the then Finance Minister, Arun Jaitley, introduced the concept of standard deduction.
What is standard deduction
The standard deduction is a fixed amount deducted from your annual gross income. However, it is essential to note that the standard deduction is a tax benefit—a way to reduce your taxable income, not an actual deduction.
The Standard Deduction under the Income Tax Act pertains to a deduction permitted under the head of salaries. Former Union FM Jaitley introduced a Standard Deduction of Rs. 40,000 in the Budget of 2018, which was subsequently raised to Rs. 50,000 in 2019. This measure alleviated the burden on the salaried class, who previously had to provide evidence for claiming deductions for transport allowance of Rs. 19,200 and medical reimbursement of Rs. 15,000 annually. The provision for Standard Deduction had been available until the Finance Act of 2005 when it was abolished. Typically deducted from the gross salary, it is then claimed as an exemption. The effective additional benefit provided by the standard deduction amounts to an income exemption of Rs. 10,000.
Let us look at how the net taxable income has changed from FY 2017-18 (when standard deduction was yet to be introduced) to FY 2019-20.
Particulars |
FY 2017-18 |
FY 2018-19 |
FY 2019-20 |
Total income (gross) |
Rs. 5,00,000 |
Rs. 5,00,000 |
Rs. 5,00,000 |
Medical reimbursement |
Rs. 15,000 |
NA |
NA |
Travel allowance |
Rs. 19,200 |
NA |
NA |
Standard deduction |
NA |
Rs. 40,000 |
Rs. 50,000 |
Net taxable income |
Rs. 4,65,800 |
Rs. 4,60,000 |
Rs. 4,50,000 |
From the above table, it is evident that the net taxable income has decreased with the introduction of standard deduction.
Moreover, before the standard deduction, individuals had to keep track of receipts for transportation and medical expenses in order to claim them as deductions. The standard deduction saves you the trouble of collecting receipts and makes filing taxes more accessible.
Who is eligible for standard deduction
All taxable salaried individuals would qualify for the Standard Deduction, regardless of whether they have the required proof of transport or medical expenses. Consequently, the main objective of tax authorities would be to alleviate employers from the administrative burden associated with collecting such documentation.
The taxpayer must calculate the income subject to taxation under the category of 'Salaries' after factoring in the Standard Deduction and any deductions applicable to entertainment allowance or professional tax. Therefore, employees should be granted the Standard Deduction of Rs. 50,000 or the amount of their salary, whichever is lower.
Conclusion
With rising inflation, standard deduction has become crucial for individuals to reduce their tax liabilities. Its introduction in 2018 eliminated the need to gather and submit documentation for medical and transportation expenses, streamlining the tax filing process for salaried employees. Additionally, the standard deduction reduces administrative burdens for employers who were previously responsible for collecting these bills. By incorporating the standard deduction into tax calculations, taxpayers can potentially save a significant amount on their overall tax liability.
