Budget 2020: Standard Deduction for Salaried Individuals
The nation eagerly awaits the Finance Minister’s speech on Budget Day. Standard deduction is perhaps one of the favourites of salaried people as it impacts their tax savings. It gives salaried employees the opportunity to save on taxes without any effort.
Continue reading to learn more about the Rs 50,000 standard deduction for salaried individuals.
RECENT BUDGETS ON STANDARD DEDUCTION
During the 2018 Budget, then Finance Minister Arun Jaitley reintroduced standard deductions for salaried individuals. The standard deduction stood at Rs 40,000. Later, in the 2019 Interim Budget, the then Finance Minister Piyush Goyal increased the amount of standard deduction to Rs 50,000. The figure remains unchanged till date. If you are a salaried individual, you can directly claim Rs 50,000 as standard deduction for both FY 2019–20 and FY 2020–21.
2018 Budget Announcement
During the 2018 Budget, Arun Jaitley, the Finance Minister of India has announced standard deductions for salaried individuals. Although it was more like the same wine in the old bottle as there were no major alterations in the taxation slabs and neither did he touch Section 80C, but he did give the salaried individuals a reason to celebrate. Put simply, he proposed to introduce the Rs 40,000 standard deduction all over again. Want to know about other tax allowances?
STANDARD DEDUCTION: WHAT IS IT?
Standard Deduction means deducting a fixed amount from the salary of an individual. In order to claim standard deduction, a person is not required to submit any proof. Standard deduction had earlier been abolished in the financial year 2006–07. However, until 2005–06, salaried people were permitted to claim a fixed sum from their salaries (i.e. around Rs 30,000 or 40% of their salaries, whichever was less) as part of the standard deduction. This deduction was applicable to individuals whose gross income was Rs 5 lakh or lower. If the overall or gross income was over 5 lakh rupees, then salaried individuals were allowed to claim a standard deduction of Rs 20,000 only.
At present, salaried persons can avail a standard deduction of Rs 40,000. This deduction is applicable on their total or gross income. The Finance Ministry has clarified in the past that the standard deduction replaces the applicable transport allowance (amounting to Rs 1,600/month) and the medical allowance (amounting to Rs 15,000 yearly). These allowances are typically subtracted from an individual’s gross income and claimed as part of the tax exemption. The necessary amendments have been made to Section 17(2) (viii) of the Income Tax Act laid down in 1961.
BENEFIT OF STANDARD DEDUCTION
When the standard deduction was introduced in 2018, it was in lieu of medical and transport allowance. That worked out to a small net deduction of Rs 5,800. However, as the cess was raised from 3% to 4% for taxpaying individuals, it would have reduced the savings impact of the standard deduction.
Since then, however, the standard deduction amount has been raised to Rs 50,000—a hike of Rs 10,000 since its introduction.
EXAMPLE OF TAX CALCULATION FOR INDIVIDUALS
Say, you earn Rs 7.8 lakh per year and get Rs 10,000 as interest on your bank deposits. Your tax-saving expenses include Rs 1.5 lakh under Section 80C and a health insurance premium of Rs 25,000 under Section 80D.
| Particulars | Amount (in Rs) |
| Gross income | 7,80,000 |
| Net income | 7,30,000 |
| Add: Income from other sources | 10,000 |
| Gross taxable income | Gross taxable income 7,40,000 |
| Less: 80C deduction | 1,50,000 |
| Less: 80D deduction | 25,000 |
| Taxable income | 5,65,000 |
| Income tax | [5% of 2,50,000] + [20% of (5,65,000 – 5,00,000)] 12,500 + 13,000 25,500 |
| Less: Rebate under 87A | 12,500 |
| Income tax payable after rebate | 25,500 |
STANDARD DEDUCTION FOR PENSIONERS
The ones who really benefited from standard deduction were pensioners. They had not been getting any medical or transport allowance. Plus, the IT department had clarified that in case a taxpaying individual got their pension through the previous employer, then it would be taxed within the ‘Salaries’ category.
Introduction of the standard deduction provided the pensioner with an additional tax benefit. Now, a taxpaying individual can claim Rs 50,000 of standard deduction or their pension amount, whichever is lower.
CONCLUSION
Standard deduction is a convenient way to reduce a salaried individual’s annual tax burden. But it also helps employers, as they can spend less time processing the medical expenses and bills of their employees.
