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Salary Deduction: Standard Deduction On Salary For Employees & Pension Income
Comprehensive Guide on the standard deduction, Definition, limit, tax saving impact, example
Standard deduction means a flat deduction to individuals earning a salary or pension income. It was introduced in the Budget 2018 in lieu of the exemption of transport allowance and reimbursement of miscellaneous medical expenses. For FY 2022-23, the limit of the standard deduction is Rs 50,000 in old regime. As per Budget 2023, Salaried taxpayers are now eligible for standard deduction of Rs. 50,000/- under new tax regime also from Financial Year 2023-24.
In this guide, let’s cover what salary deduction u/s 16 and other deductions are available on the pension income.
Important: e-verify your income tax return within 30 days, else your return will be considered as not filed.
What is a standard deduction in the Income Tax Act?
The standard deduction is a flat deduction of Rs. 50,000/- from your income that is taxable under the head salaries. This tax benefit can be claimed irrespective of the actual amount spent on the following:
- Transport Allowance and
- Medical Allowance
Let us understand the comparative tax benefit given by the standard deduction on salary or salary deduction for various years since its introduction:-
| Particulars | Before Standard Deduction | For FY 2018-19 | For FY 2019-20 | From FY 2020-21 |
|---|---|---|---|---|
| Specific Condition for exemption | Should be provided by the employer | No Requirement/condition | No Requirement/condition | Assessee should not opt for the New Tax Regime u/s 115BAC |
| Transport Allowance Exp | 19200 | 0 | 0 | 0 |
| Medical Allowance Exp. | 15000 | 0 | 0 | 0 |
| Standard Deduction in place of the above allowances | 0 | 40000 | 50000 | 50000 |
| Deductions available | 34200 | 40000 | 50000 | 50000 |
What is the purpose of Standard Deduction?
The purposes of introducing standard deduction are:
- To reduce paperwork and allow for deductions irrespective of the actual expenses.
- To provide tax relief to middle-class salaried individuals.
- To provide benefits to pensioners.
What are income tax exemptions for salaried employees
The standard deduction is an Income Tax exemption that helps middle-class employees in terms of reduction in their tax liability.
The income tax exemptions for salaried employees are as follows:
| Particulars | From F.Y. 2019-20 till today(old regime) | F.Y. 2018-19 | Before Standard Deduction |
|---|---|---|---|
| Gross salary | 9,00,000 | 9,00,000 | 9,00,000 |
| Less: HRA exemption | 60,000 | 60,000 | 60,000 |
| Less: LTA exemption | 85,000 | 85,000 | 85,000 |
| Less: Transport Allowance | - | - | 19200 |
| Less: Medical Allowance | - | - | 15000 |
| Less:- Other exemption | 20,000 | 20,000 | 20,000 |
| Net Salary (A) | 7,35,000 | 7,35,000 | 7,00,800 |
| Less: Standard Deduction(B) | 50,000 | 40,000 | 0 |
| Taxable salary(C)= (A)-(B) | 6,85,000 | 6,95,000 | 7,00,800 |
| Income Tax on (C) | 49,500 | 51,500 | 52,660 |
| Add: Cess @ 4% | 1,980 | 2,060 | 2106* |
| Total tax | 51,480 | 53,560 | 54766 |
| Tax savings compared with FY 18-19 Tax savings compared with FY 17-18 (For comparison, Cess taken as 4% (if taken at 3%, then the benefit would have been 2,790 ) |
2,080 3,286 |
What is the Impact of standard deduction on Pensioners?
The decision to allow standard deductions provided significant benefits to pensioners. These pensioners normally did not enjoy any allowance on account of transport and medical expenses. However, the benefit of the standard deduction will be allowed to pensioners only if the pension is taxable as salary income. If income is from the other source, then the benefit of the standard deduction will not be available.
What are income tax deductions for salaried employees?
The amount of standard deduction cannot exceed the salary amount. The amount of deduction will be Rs. 50,000/- or equal to the salary amount, whichever is lower. The principal amount that is paid against a loan taken for the higher studies or your dream home is eligible for standard deduction for salaried people. One can typically claim up to Rs. 1.5 lakh on other kind of investments, and, up to Rs. 2 lakh for a home loan on principal amount.
You can make claim deductions of income tax for salaried people under section 80C, 24, and Section 80E.
What are examples of the salary deduction?
Here is an example of the salary deduction for FY 2022-23
| Particulars | Amount |
|---|---|
| Gross Salary | 3,50,000 |
| HRA exemption | 80,000 |
| LTA exemption | 1,10,000 |
| Other exemption | 1,30,000 |
| Net Salary | 30,000 |
| Standard Deduction Rs. 50,000 or Amount of salary, i.e., 30,000 (lower of both) |
30,000 |
How is the standard deduction calculated in the case of multiple employers?
The standard deduction is not available on the basis of no. of employers. The standard deduction on salary or salary deduction is the overall limit for a whole year rather than the no. of employers.
Let’s say Mr. A worked for 2 employers during the FY 2022-23. In that case, you may come up with doubt about how much amount of a standard deduction Mr. A can claim
Option 1 Rs. 50,000
Option 2 Rs. 1,00,000 (Rs. 50,000 for each employer)
The correct Answer is Option 1, i.e., Mr. A can take benefit of the standard deduction upto Rs. 50,000/-
What is the standard deduction in New Tax Regime?
Budget 2020 has introduced a new tax regime (FY 2020-21) under which income would be taxable at lower rates. To avail of this option, the taxpayer will have to forego major tax exemptions and benefits, including standard deduction.
As per Budget 2023, Salaried taxpayers are now eligible for standard deduction of Rs. 50,000/- under new tax regime also from Financial Year 2023-24.
Standard Deduction Impact on Tax on Salary Income
| Particulars | FY 2022-23 (Old Tax Regime) | FY 2020-21 2022-23 (New Tax Regime) |
|---|---|---|
| Income from Salary | 3,50,000 | 3,50,000 |
| Less: Standard Deduction | 50,000 | - |
| Taxable Salary | 3,00,000 | 3,50,000 |
Frequently Asked Questions
Q- Is standard deduction available to senior citizens also?
Yes, the standard deduction is available to all salaried taxpayers & pensioners, irrespective of their age.
Q- Can I claim the standard salary deduction even if my income is more than Rs 5,00,000?
The standard salary deduction is available irrespective of your salary amount. The benefit will be given to you if you have a salary income. The amount of salary is irrelevant in this case.
Q- Do I need to submit proof to claim a standard deduction under Income Tax?
The standard deduction is a flat deduction for which no proof is required to be furnished by an employee to the employer/IT Department.
Q- How is the standard deduction different from income tax deductions?
Income tax deduction generally means Deductions under chapter VIA (like deduction u/s 80C , 80D , etc.)
| Standard Deduction | Chapter VI-A Deduction like sections 80C, 80D, etc. |
| It is a flat deduction irrespective of the actual expenditure. | These deductions are available on the basis of the actual expenditure/investment. |
| This deduction is available only to individuals having income from salary. | These deductions are available from all sources of Income. |
| This deduction is allowed from salary income before arriving at Gross Total Income. | These deductions are allowed after calculating Gross Total Income. |
| The limit of the standard deduction is Rs. 50,000/- | Limit of deduction varies from section to section. Like u/s 80C, the limit is Rs. 1,50,000 |
Q- Can an employee claim both standard deduction & income tax deduction?
Yes, an employee can claim both standard deduction & income tax deductions.
Q- Which section of the Income Tax Act covers standard deduction?
Section 16(ia) of the Income Tax Act deals with the standard deduction.
Q- Whether the standard deduction is calculated monthly?
The standard deduction on salary, or salary deduction is not calculated monthly. A flat deduction is allowed at the time of filing ITR for the assessment year.
Q- Is standard deduction available for self-employed in India?
Self-employed people don’t get a salary income. They have a business income. Hence, the standard deduction cannot be claimed by self-employed individuals since the standard deduction is available from salary income only.
Q- Is standard deduction applicable to employees of the Central or State Government?
Yes, the standard deduction is available to central or state government employees.
Q- Is standard deductions of Rs 50,000 under section 16 applicable to a person whose only source of income is interest from FDs?
No, Standard deduction is only available from salary & pension income and not on Income from other sources.
Q- Is a standard deduction component mandatory to build a pay scale? I don't have one in my salary structure. Who defines it and how do I get it added to avail tax exemption?
To claim the benefit of standard deduction it is not mandatory to have it mentioned in your pay scale or payslip. You can directly take the benefit at the time of filing ITR. The benefit of standard deduction is also available in Form-16 if you have opted for the Old Tax Regime. Benefit of standard deduction is not available under the new Tax Regime. As per Budget 2023, Salaried taxpayers are now eligible for standard deduction of Rs. 50,000/- under new tax regime also from Financial Year 2023-24.
Q- My payslip says that I have deductions u/s (10) and (17), amounting to INR 87168. What does this mean?
If you have a payslip with the deductions mentioned then this means you are eligible to claim exemption of the same from your salary income in respect of various allowances and perquisites, etc.
Q- How do I claim deductions not accounted for by the employer in Form-16?
You can claim deductions at the time of filing Income Tax Return if the same is not accounted for by the employer, provided you are eligible to claim the deduction.
Q- What is the Standard Deduction under u/s 16(ia)?
Standard deduction means a flat deduction to individuals earning salary or pension income if they have opted for the Old Tax Regime. It was introduced back in Budget 2018 in lieu of exemption of transport allowance and reimbursement of miscellaneous medical expenses. For FY 2022-23 the limit of the standard deduction is Rs 50,000.
Q- How much Standard deduction can I claim without receipts?
Standard Deduction is a flat deduction amounting to Rs. 50,000 and is available without any receipt or any documentary proof.
Q- Will standard deduction change in 2021?
Standard Deduction for FY 2022-23 is of Rs. 50,000/- same as of FY 2021-22.
Q- Is standard deduction part of 80C?
No. Standard Deduction of Rs. 50,000/- is over and above the limit of 1,50,000 under section 80C.
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