Taxpayers for the FY 2019 – 20 can claim a standard deduction of Rs. 50,000, thereby reducing their taxable income significantly. Here, in this guide, let’s take a detailed look at the standard deduction available to salaried taxpayers while filing their income tax.
Introduction of the Standard Deduction in the Union Budget of 2018
The standard deduction was not always available, and it was introduced relatively recently. It was in the Union Budget of 2018, presented by then Finance Minister, Mr. Arun Jaitley, that launched standard deduction. Initially, the amount was fixed at Rs. 40,000 per annum for salaried individuals. The standard deduction replaced the earlier deductions, like the medical reimbursement of Rs. 15,000 and transport allowance of Rs. 19,200 per annum.
An interesting point to note here was that the standard deduction was available earlier. However, it was scrapped by the Finance Act of 2005. Generally, medical and transport allowances were deducted from the gross salary. In 2018, the Union Government proposed amendments to Section 17(2) (viii) of the ITA. As a result, the standard deduction of Rs. 40,000 came into place, replacing the medical and transport allowances that were permitted earlier.
Increase in the Standard Deduction to Rs. 50,000 in the Interim Budget of 2019
The interim budget that was presented in parliament on 1st February 2019 increased the tax benefits available to the middle class, especially salaried individuals. One noteworthy benefit was the increase in the standard deduction available for salaried individuals from Rs. 40,000 to Rs. 50,000. This increase helps taxpayers reduce their tax burden significantly.
Let’s illustrate the changes made to the standard deduction with an example.
|Deductions Available||Until FY 2017 – 2018||From FY 2018 – 2019||From FY 2019 – 2020 and onwards|
|Gross salary||Rs. 7,00,000||Rs. 7,00,000||Rs. 7,00,000|
|Transport Allowance||Rs. 19,200||Not available||Not available|
|Medical Allowance||Rs. 15,000||Not available||Not available|
|Standard Deduction||Not applicable||Rs. 40,000||Rs. 50,000|
|Net taxable salary||Rs. 6,65,800||Rs. 6,60,000||Rs. 6,50,000|
From the above illustration, one can easily understand that the standard deduction has reduced taxable income significantly.
Does standard deduction apply for pensioners?
Yes, in a recent clarification published by the IT (Income Tax) department, it was noted that pensioners who pay taxes are eligible for the standard deduction. This is because pensions received from the former employer are classified as "salaries" for income tax calculation and are taxable.
Pensioners can claim the standard deduction of Rs. 50,000 from the FY 2019 – 20 (AY 2020 -21) as proposed by the Interim Union Budget of 2019.
Additional Reading: What are the income tax exemptions available for salaried individuals in India?
The standard deduction for salaried taxpayers has been raised from Rs. 40,000 to Rs. 50,000 from the FY 2019 – 20 onwards.
Individuals earning up to Rs. 5 lakhs in a year can claim a full tax rebate. However, they are still required to file their income taxes.
The TDS threshold for interest earned via the post office and bank deposits has been raised from Rs. 10,000 to Rs. 40,000 per annum.
The standard deduction is a win-win situation for both employees and employers. Employees can enjoy extra deductions on their gross salary, thereby significantly reducing taxable income and the overall taxes paid. Employers, on the other hand, stand to benefit from the reduction of administrative tasks involved with the medical and transport allowances offered earlier. Standard deduction frees up paperwork, while simplifying income tax calculations, as well.