Standard Deduction in income tax is a fixed deduction that individuals can claim from their taxable income. It serves as a benefit provided by the government to reduce tax liabilities. Essentially, it’s a set amount that can be subtracted from your total income before calculating taxes.
Standard Deduction was reintroduced in Budget 2018, replacing earlier benefits like transport and medical allowances. It’s available to specific groups like salaried employees and pensioners, offering a straightforward way to lower tax burdens. In this comprehensive guide, we will be discussing what is standard deduction in income tax?
Latest Update
Salaried taxpayers can claim a standard deduction of INR 50,000 under both the old and new tax regimes from FY 2023-24. No changes were made in the 2024 Budget regarding this deduction.
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What is Standard Deduction in income tax?
Standard Deduction in income tax is a deduction under the Income Tax Act allowed for salaries. Former Finance Minister Jaitley introduced a Standard Deduction of INR 40,000 in Budget 2018, which later increased to INR 50,000 in 2019.
This relieved salaried individuals from providing proof for transport allowance of INR 19,200 and medical reimbursement of INR 15,000 annually. Standard Deduction was reinstated in 2018 after being abolished in the Finance Act 2005. It’s typically deducted from gross salary and claimed as an exemption, providing an additional benefit of INR 10,000.
For example, imagine you earn INR 5,00,000 a year and the government says you can deduct INR 50,000 from that before calculating your tax. So, instead of paying tax on INR 5,00,000, you pay tax on only INR 4,50,000. It’s like getting a discount on your tax bill. That’s standard deduction – a simple way to reduce your tax bill.
How does Standard Deduction work?
Let’s say your total income for the year is INR 6,00,000. Now, if the government allows a standard deduction of INR 50,000, you can subtract this amount from your total income. So, instead of paying taxes on INR 6,00,000, you’ll pay taxes only on INR 5,50,000.
Who is eligible for Standard Deduction?
All taxable salaried individuals are entitled to the Standard Deduction in Income Tax, regardless of whether they have proof of transport or medical bills. This is aimed at relieving employers from the administrative burden of collecting these bills.
Taxpayers must calculate their income under the ‘Salaries’ head after applying the Standard Deduction and other deductions like entertainment allowance or professional tax. Hence, employees should receive either the standard deduction of INR 50,000 or the amount of their salary, whichever is lower.
In simple words, standard deduction is available to salaried individuals and pensioners.
What are the documents needed for Standard Deduction?
To claim the standard deduction for salary income, no supporting documents are required. However, for filing income tax returns, you’ll need to provide the following documents and complete necessary forms:
- Bank statements for the relevant financial year.
- Income statements from interest or fixed deposits.
- Tax Deducted at Source (TDS) certificates.
- Investment documents.
- Form 26AS and Form AIS.
Why was Standard Deduction introduced?
Standard deduction was reintroduced in 2018 by the government to provide relief to taxpayers, especially the middle and lower-income groups. It simplifies the tax filing process and provides a basic deduction to every taxpayer.
Standard Deduction in New Tax Regime
The new tax regime introduced in Budget 2020 offers taxpayers the option of paying concessional tax rates. Major exemptions and deductions are not allowed.
In Budget 2023, an amendment allowed a standard deduction of INR 50,000 in the new regime too. Thus, now you can claim the standard deduction of INR 50,000 under both the new and old regimes.
How is Standard Deduction calculated for multiple employers in a year?
The standard deduction is a flat deduction from the total salary earned in a financial year. It doesn’t depend on the number of employers. Therefore, one deduction is available for the combined salary earned from all employees. For FY 2023-24, the standard deduction remains the same as the previous year at INR 50,000.
Standard Deduction in Union Budget 2018
In Budget 2018, Finance Minister Arun Jaitley introduced a standard deduction of INR 40,000, much to the delight of the salaried class. It replaced the INR 19,200 transport allowance and INR 15,000 medical reimbursement per annum.
Interestingly, Standard Deduction was available earlier but was abolished in the Finance Act 2005.
The standard deduction is typically deducted from the gross salary and claimed as a deduction. It can be claimed by all salaried employees regardless of category or the need for any investment.
How much is the Standard Deduction?
As per the current rules, the standard deduction is INR 50,000 for salaried individuals and pensioners.
What are the advantages of Standard Deduction in Income Tax?
- Simplicity:
- It simplifies tax calculations and reduces the need for various exemptions and deductions.
- Universal Benefit:
- Every taxpayer, irrespective of their expenses, can avail themselves of the standard deduction.
- Reduction in Taxable Income:
- It lowers your taxable income, resulting in lower tax liability.
What are the limitations of Standard Deduction in Income Tax?
- Fixed Amount:
- The standard deduction is a fixed amount and may not cover all your expenses.
- No Scope for Additional Deductions:
- You cannot claim any other deductions if you opt for the standard deduction.
How to claim Standard Deduction in Income Tax?
Claiming standard deduction is easy. Just ensure it is mentioned in your Form 16 (for salaried individuals) or pension slip (for pensioners). While filing your income tax return, mention the standard deduction amount in the appropriate section.
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In conclusion, standard deduction in Income tax is a tax benefit provided by the government to reduce your taxable income. It’s a fixed amount that every eligible taxpayer can claim, thereby lowering their tax burden. Standard deduction can help in optimizing tax planning and financial decisions.
Looking for Income Tax related services, reach out to an expert tax consultant.
FAQs
1. What is Standard Deduction in income tax?
Standard Deduction in income tax is a fixed amount that individuals can subtract from their taxable income, reducing the amount on which they are taxed. It’s provided by the government to all salaried individuals and pensioners, offering a basic deduction without the need for specific expenses.
2. Who is eligible for Standard Deduction in income tax?
Salaried individuals and pensioners are available for a standard deduction. It allows them to reduce their taxable income by a fixed amount without the need for any specific expenses.
3. How much is the Standard Deduction for income tax?
The Standard Deduction for income tax is currently INR 50,000 for both salaried individuals and pensioners.
4. Is Standard Deduction applicable in both old and new tax regimes?
Yes, a Standard Deduction of INR 50,000 is applicable in both the old and new tax regimes from FY 2023-24 onwards.
5. What expenses does the Standard Deduction cover?
Standard Deduction covers a wide range of expenses. It replaces the earlier benefits of transport allowance and medical reimbursement, providing a fixed deduction without the need for specific expenses.
6. How does Standard Deduction benefit taxpayers?
Standard Deduction simplifies tax filing by providing a fixed deduction without the need for maintaining detailed expense records. It reduces taxable income, resulting in lower tax liability for taxpayers.