Standard Deductions for Salaried Individuals: All you need to know
Paying taxes is necessary for the development of the nation as it constitutes a major part of the government’s revenue. However, paying taxes decreases the net actual income of individuals and is often seen as a burden by many. Taxpayers can reduce this burden by making investments and following other tax saving measures as defined under different sections of the Indian Tax Act. But about those who do not have or do not wish to make any investment or are not interested in using tax saving measures? They can also claim a deduction through Standard Deduction in Income Tax Act.
Standard Deduction: Overview
Standard deduction, as offered in the Indian Tax Act is a flat deduction that individuals can claim on their income and reduce their tax liability. Salaried individuals and pensioners can claim a flat deduction on their annual income without the need for making any investment for saving taxes. The provision of standard deduction on salary was in force until 2005 before being abolished by the Finance Act of 2005. However, the government reintroduced the provision of the standard deduction and revised the deduction limit later to help taxpayers save tax without going through the complexities of making tax saving investments.
Changes in Standard Deduction
- As said, a standard deduction of Rs 40,000 was available for taxpayers until 2005. However, the Finance Act of 2005 abolished the provision and left transportation allowance and medical allowance to be shown as deductions while filing ITR.
- The provision was reintroduced by the government of India in the 2018 Budget or Annual Year 2019-20. The newly introduced standard deduction in Income Tax Act replaced the provision for income deductions on transport allowance and medical allowance.
- In the Interim Budget of 2019, the government gifted taxpayers with an increased limit for standard deduction in the new tax regime. The limit was increased to Rs 50,000 from the previous limit of Rs 40,000.
- The government kept the provisions for standard deduction 2021-22 the same as no change was made in the 2020 and 2021 Budget.
Let us summarize this in a table:
Standard deduction in different tax regimes
|Deductions||Until AY 2018-19||AY 2019-20||From AY 2020-21|
|Transport Allowance||Deduction applicable of up to Rs 19,200||No deduction applicable||No deduction applicable|
|Medical Allowance||Deduction applicable of up to Rs 15,000||No deduction applicable||No deduction applicable|
|Standard Deduction||No deduction applicable||Flat deduction applicable of Rs 40,000||Flat deduction applicable of Rs 50,000|
How Standard Deviation Works?
The standard deduction under Section 16(ia) of the Indian Tax Act offers a flat deduction of Rs 50,000 on annual income to help salaried individuals and pensioners save tax.
Standard deduction is subtracted from the gross annual income of the taxpayer. The resulting income after deduction is the net taxable income.
The salaried individual or pensioner does not have to make any investment in order to claim the standard deduction.
We can also understand this with an example:
Suppose Arun has had an annual income of Rs 10 lakhs since 2017. He does not make any investment to claim tax benefits. Now let us see what deduction related to abolition and reintroduction of standard deduction Arun can enjoy
|Income and Deductions||Until AY 2018-19||AY 2019-20||From AY 2020-21|
|Arun’s Gross Salary||Rs 10,00,000||Rs 10,00,000||Rs 10,00,000|
|Tax Saving Investments||Nil||Nil||Nil|
|Maximum Deduction on Transport Allowance||Rs 19,200||Not applicable||Not applicable|
|Maximum Deduction on Medical Allowance||Rs 15,000||Not applicable||Not applicable|
|Standard Deduction||Not applicable||Rs 40,000||Rs 50,000|
|Net Taxable Income||Rs 9,65,800||Rs 9,60,000||Rs 9,50,000|
Hence, with standard deduction under Section 16(ia) for 2021-22, Arun can decrease his taxable income by Rs 15,800 and Rs 10,000 when compared to AY 2018-19 and AY 2019-20 respectively.
Moreover, not only salaried individuals like Arun, but even pensioners can enjoy similar tax benefits from the standard deduction. Income from the pension is classified under ‘Salaries’ head and hence, it is taxable. Thereby, pensioners can also claim a flat deduction of Rs 50,000 and enjoy tax benefits
Standard deduction in case of New Tax regime
Budget 2020 introduced a new tax regime. Under this new regime, the taxpayers have an option to pay concessional tax rates , however major deductions and exemptions are not allowed under this new regime. Standard deduction allowed from salary income is also not allowed if the taxpayer for filing of return in the new tax regime.
|Particulars||Old Tax regime (FY 2021-22)||New tax regime (FY 2021-22)|
Benefits of Standard Deduction
There are a number of benefits of the standard deduction for taxpayers as it allows them to reduce their tax liability easily and in a completely hassle-free manner.
Flat Deduction: Standard deduction is a flat deduction that taxpayers can show while filing ITR. It does come with any maximum limit or ‘least amount’ conditions like other tax saving provisions of the Income Tax Act.
Works better than tax saving investment options: Salaried individuals who do not wish to make any investment, the standard deduction u/s 16 (ia) is the best way to reduce the tax liability. For example, if your annual income is up to Rs 5.5 lakhs, you can claim a deduction of Rs 50,000 through annual deduction and get a tax rebate on the remaining annual income of 5 lakh under Section 87A. This makes your income completely tax-free.
Completely hassle-free way to save tax: Unlike other tax saving methods like showing rent paid, interest paid on a home loan, making tax saving investments where you need to furnish proof of all such deductions, standard deduction proves to be handy allowing taxpayers to enjoy lower tax liabilities without any documentation or paperwork.
Can self-employed individuals claim standard deduction?
No, self-employed individuals cannot claim the standard deduction on their income as they do not get a salary. Standard deduction is only applicable to salaried employees.
Is there any way to claim deduction for transport and medical allowance along with standard deduction?
No, you cannot claim transport or medical allowance. You can only claim standard deduction on your annual income. Provisions for transport and medical allowance deductions had been replaced with the reintroduced standard deviation in the 2018 Budget.
What documents do I need to submit along with ITR in order to claim standard deduction?
You do not need to submit any documents in order to claim standard deduction while filing ITR.
Can I claim both standard deduction and other deductions?
Yes, you can claim both standard deduction and other deductions such as deduction on HRA, interest paid on the home loan, donations made, tax saving investments, etc.
Can government employees claim the standard deduction?
Yes, government employees can also claim the standard deduction as they are also salaried individuals.