Standard Deduction on Salary: How It Reduces Your Taxable Income

Budget 2024 Update

Finance Minister Nirmala Sitharaman has announced a hike in the standard deduction. With effect from FY 202-25 (AY 2025-26), the standard deduction is increased from Rs 50,000 to Rs 75,000 under the new income tax regime. There is no change under old tax regime.

Also, standard deduction limit for family pensioners have been hiked to Rs 25,000 from Rs 15,000.

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.

Who is Eligible to Claim a Standard Deduction?

The standard deduction can be claimed by individuals receiving salary and pension, excluding business owners. However, for the following cases, the standard deduction will not be applicable:-

• Married individuals file separately if the spouse itemizes deductions.
• Taxpayers with dual status or non-resident alien status during a specific fiscal year.
• Taxpayers filing returns for a period of less than a year.

How Does Standard Deduction Reduce Taxable Income?

The standard deduction is a flat deduction of Rs. 50,000 under ols tax regime and Rs. 75,000 under new tax regime on the taxable income of salaried employees and pensioners, irrespective of their earnings. This deduction is straightforward and does not require any evidence or proof of investment. It is provided to cover expenses that are not eligible for deductions under other sections of the Income Tax Act.

For example, the standard deduction of Rs. 50,000 can result in significant tax savings for those in higher tax brackets. To put it into perspective, if you are in the highest tax bracket of 30%, this deduction can save you up to Rs. 15,000 in taxes.

Standard Deduction for Pensioners

The legal framework in India recognizes individuals aged between 60 and 80 years as senior citizens, a classification that comes with certain privileges and responsibilities. Specifically, a pension serves as a stipend or periodic allowance granted to individuals, especially senior citizens, in acknowledgment of their past service.

In alignment with the Indian Taxation System, the pension received by senior citizens from their former employers is considered taxable income and falls under the category of 'salaries.' This implies that senior citizens need to adhere to tax regulations applicable to salary income.

Section 16 of the Income Tax Act provides relief to pensioners by allowing them to claim a deduction of up to Rs. 50,000/ Rs. 75,000 per annum or the actual amount of the pension, whichever is less. This provision has a dual effect: it recognizes the financial challenges faced by senior citizens and provides a means to mitigate their tax liability.

It's noteworthy to mention that the reintroduction of standard deduction has further alleviated the financial burden on senior citizens. The standard deduction is a fixed amount deducted from the total income before calculating the taxable income. This measure not only simplifies the tax calculation process but also contributes to the overall financial well-being of senior citizens.

Standard Deduction in New Tax Regime

In a significant shift post the 2023 Budget, the standard deduction, previously exclusive to old regime taxpayers, has been broadened to encompass new tax regime taxpayers as well. This means that as of the financial year 2023-2024, all salaried taxpayers can now benefit from the standard deduction, regardless of their chosen tax regime.

Adding to this positive change, individuals are allowed to claim a standard deduction of Rs 50,000 in the new regime as well. From FY 2024-25, the standard deduction under the new tax regime has been increased to Rs. 75,000. This move reflects a thoughtful expansion of benefits, especially designed to provide additional financial relief to pensioners and align with the government's commitment to addressing the diverse needs of taxpayers.

Example of Standard Deduction

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 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/-

Documents Required for Standard Deduction

While there is no need to produce any documents for claiming the standard deduction, you must produce the following documents at the time of income tax return filing.

• Bank statements of related previous year.
• Income statements from interest or fixed deposits.
• TDS (Tax Deducted at Source) certificates.
• Investment documents.
• Form 26AS and Form AIS.