Standard Deduction from Salary & Pension Income: The Income Tax Act includes procedures for levying taxes on citizens’ incomes and consists of a combination of techniques for claiming deductions and tax refunds. Deductions are authorized dependent on how taxpayers utilize their own money.
- What is the Standard Deduction Under the Income Tax Act?
- What is the significance of this deduction?
- What is its immediate impact?
- What is the maximum allowable standard deduction?
- An application of a standard salary deduction
- In the context of multiple employers, how is the standard deduction assessed?
- Standard Deduction in the case of a New Taxation System
- How Is The Standard Deduction Displayed On An Income Tax Return?
- Miscellaneous Deductions Available to Salaried Employees
- How does the standard deduction vary from income tax deductions?
- Frequently Asked Questions
What is the Standard Deduction Under the Income Tax Act?
The term “standard deduction,” as stated in Section 16(i)(ia), corresponds to a direct reduction of the wage earned income up to Rs.50,000/-.
Salaried employees and pensioners are entirely entitled to a fixed limit under the standard deduction by default, without any investment or expense on the part of the individual taxpayers. Typically, the standard deduction is withdrawn from the gross salary and filed as a tax exemption.
In Budget 2018, Minister Of finance Jaitley officially announced the Standard Deduction of Rs. 40,000, allowing the salaried class to have something to celebrate about. It substituted the Rs. 19200 transport allowance and the Rs. 15,000 medical reimbursement annually.
Remarkably, the Standard Deduction provision was formerly accessible to the public.
It was, eventually, eliminated in the Finance Act of 2005.
The Interim Budget, which was published on February 1, 2019, featured a whole slew of tax breaks for salaried and middle-class taxpayers prominently. Among these, a significant increase in the Standard Deduction of Rs. 10,000 (from Rs.40,000) was particularly notable.
Note: From Financial years 2020-21 (AY 2021-22), an entity can only obtain the deduction if they prefer the previous taxation system.
Let us analyze the actual tax benefit offered by the standard deduction.
Suppose the Transport Allowance is Rs. 19,200.
The Medical Allowance is Rs. 15,000.
- Now, for the financial year 2018-19, the standard deduction was Rs. 40,000. Hence, the net tax benefit amounted to Rs. 5,800.
- Similarly, for the financial year F.Y. 2019-20 & F.Y. 2020-21, the standard deduction was Rs. 50,000. Hence, the net tax benefit amounted to Rs. 15,800.
What is the Significance of this Deduction?
One of the objectives was to deliver tax relief to middle-class taxpayers while still extending benefits to retirees.
While the benefit of this provision on the salaried employees might very well seem to be very little, employers stand to profit from this move in light of avoiding a sizable proportion of administrative effort in filing medical costs for their workers.
What is its Immediate Impact?
- The implementation of the standard deduction greatly aided middle-class employees in regards to lessening their tax obligation. The total additional deduction amount was Rs. 5,800 (Rs. 15,800/- for the fiscal year 2019-20).
- This policy to permit standard deduction considerably assists pensioners, who don’t ordinarily get any tax allowance for transportation or medical bills. Likewise, retirees will only be liable for the standard deduction if their taxes are paid as gross salary. If it is filed to the IRS as other sources of income, the standard deduction will not be accessible.
Note: According to a recent statement published by the income tax department, if a taxpayer receives a pension from a previous employer, it is taxed under the heading ‘Salaries.’
As a consequence, the taxpayer is liable to a standard deduction of Rs. 50,000 or the amount of his or her pension, whatever is less.
What is the Maximum Allowable Standard Deduction?
The total amount of the standard deduction cannot surpass the value of the paycheck. The ceiling deduction shall be Rs. 50,000/- or the salary amount, whichever would be less.
An Application of a Standard Salary Deduction
Consider the following details to better comprehend the scenario.
- Gross Salary = Rs. 3,50,000
- HRA exemption = Rs. 80,000
- LTA exemption = Rs. 1,10,000
- Other exemption = Rs. 1,30,000
- Net Salary = Rs. ( 3,50,000- 80,000- 1,10,000 – 1,30,000) = Rs. 30,000
- Standard Deduction = Rs. 30,000 ( Since Rs. 30,000 is less than the maximum allowable sum of Rs. 50,000 )
The net benefit is not constant. If we modify the numbers, it will alter.
In the Context of Multiple Employers, How is the Standard Deduction Assessed?
The standard deduction is not obtainable depending on the number of employers. The standard deduction is the maximum limit for the whole year, rather than just the number of employers.
For clarity, consider the following example.
Assume Mr. A operated for two companies in the fiscal year 2019-20. In such a situation, you might be questioning how much of Mr. A’s standard deduction he can receive.
Two possibilities appear to be credible.
- Option 1: 50,000 rupees
- Option 2: 50,000 rupees for each employer, ie, Rs. ( 50,000 + 50,000) = Rs. 1,00,000
As previously stated, the standard deduction is the total amount; hence, the first option is approved, i.e., Mr. A can reap the benefits of the standard deduction up to Rs. 50,000/-.
As a result, a single fixed deduction is permitted for the total pay obtained from all employers.
Standard Deduction in the case of a New Taxation System
Budget 2020 brought in a new taxation system. Under this new system, taxpayers choose to pay decreased tax rates; however, substantial deductions and exemptions are not legally permitted.
Individuals who choose a new tax system are not eligible to receive the Rs 50,000 salary standard deduction. They are ineligible to receive section 80C deductions of Rs 150,000 and interest deductions of up to Rs 200,000 on a self-occupied property.
Assume a person’s salary is Rs. 3,50,000.
Now, under the old taxation structure, an Rs. 50,000 deduction was permitted, reducing the taxable income to Rs. ( 3,50,000- 50,000) = Rs. 3,00,000.
However, there is no applicable deduction under the existing taxes structure. As a consequence, the taxable income stays at Rs. 3,50,000.
How Is The Standard Deduction Displayed On An Income Tax Return?
The online taxation registration form for salaried people is ITR -1. This Form already has the individual taxpayer’s credentials, such as his name, PAN, Aadhaar number, etc. As a key component of this, the salaried employee must specify the required additional data:
- Gross salary
- Allowances allowed under section 10
- Net salary
- Deductions received under section 16
Once you upload all of the details on Form ITR -1, the Form automatically generates the ultimate taxable income.
Miscellaneous Deductions Available to Salaried Employees
In addition to the above-mentioned basic standard deduction, the Income Tax Act of 1961 provides significant deductions and allowances to salaried income. Deductions under Sections 80C, 80D, and 80E decrease an employed taxpayer’s tax liability.
How Does the Standard Deduction vary from Income Tax Deductions?
- The standard deduction is a pre-determined deduction that is not affected by actual expenses.
For the deductions under Section VI-A, actual expenditure/investment is the ground for deductions.
- Individuals with salary income are not eligible for the standard deduction.
The other deductions can be applied from every other source of revenue.
- Prior to actually computing the Gross Total Income, the standard deduction is authorized from pay income.
These deductions are permissible after computing Gross Total Income under Section VI-A.
- The standard deduction upper limit is Rs. 50,000/-. ( Rs. 40,000 for FY 2018-19).
For the other deductions, the deduction ceiling changes per section.
For example, the cap under Section 80C is Rs. 1,50,000.
FAQ’s on Standard Deduction from Salary & Pension Income
Can I deduct Rs 50,000 for prior returns as well?
Unfortunately, you may only claim a tax deduction of Rs. 50,000 for the financial year 2019-2020. Formerly, the maximum amount was Rs. 40,000.
Can I receive transportation and medical allowances in addition to the standard deduction?
Absolutely not. You could only take the standard deduction of Rs. 50,000, not quite the transportation and medical expenditures.
Is the standard deduction easily accessible to senior citizens as well?
Certainly, the standard deduction applies to all waged taxpayers and pensioners, regardless of age or gender of age.
Can I consider taking the standard deduction if my revenue increases Rs 5,00,000?
The standard deduction is obtainable notwithstanding your income tax bracket. If you have a salary and benefits, you will be liable for the benefit. In this instance, the quantity of income is relatively insignificant.
Is it possible for an employee to accept both the standard deduction and the income tax deduction?
Absolutely, an employee can deduct respectively standard deductions and income taxes.
Is the standard deduction implemented on a monthly basis?
The standard deduction is not assessed every month. For the whole year, a fixed deduction is granted.
Is the standard deduction of Rs 50,000 valid to someone whose primary source of income is F.D. interest?
No, the standard deduction is exclusively offered on salary and pension income and not in other forms of income.
How can I recover deductions that my employer did not account for on Form-16?
You may claim deductions at the time of filing returns if they are not reported for by your company if you are perfectly entitled to do otherwise.