What is Standard Deduction in India?

What is Standard Deduction in India?

Standard Deduction means a fixed deduction from the Income of the taxpayer without having the requirement of any bill, proof or supporting documents. Every Individual can claim this deduction irrespective of the expenses occurred or investment made.

In India there are two types of Standard Deduction stipulated under the Income Tax Act:

  • Standard Deduction of Flat ₹ 50,000 from the Salary or Pension Income (₹ 40,000 till AY2019-20, increase to ₹ 50,000 from AY 2020-21).
  • Standard Deduction of flat 30% on Net Asset Value under Income from House Property.

Standard Deduction for Salaried Individuals or Pensioners ₹ 50,000 Flat

Interim Budget 2019 has wooed common man by bringing many tax sops and making income free from tax up to ₹ 5 lakhs. One such tax sop is increasing the limit of the standard deduction from ₹ 40,000 to ₹ 50,000.

The standard deduction was the part of income tax act till 2004-05 but was done away with in Union Budget 2005-06 by then Finance Minister P. Chidambaram. He introduced medical reimbursements and transportation allowances but now from Assessment Year 2019-20, both medical reimbursements and transportation allowance are replaced by the standard deduction.

All about Standard Deduction from Salary or Pension

  1. Standard Deduction allows a flat deduction of a specified amount (i.e. ₹ 50,000) from the income of salaried taxpayers towards expenses incurred during the course of employment. Say for example if your salary is ₹ 5.20 lakh then you can start calculating tax by deducting ₹ 50,000 straight away i.e. start with ₹ 4.70 lakh.
  2. It was reintroduced by abolishing medical reimbursements and transport allowance, enhancing a deduction by just ₹ 15,800 (earlier ₹ 5,800) which would in turn saves tax of ₹ 790 for the person falling in lowest tax bracket of 5%, ₹ 3,160 for person falling in tax bracket of 20% and ₹ 4,740 for the person falling in highest tax bracket of 30%.
  3. Unlike Medical Reimbursements and Transport Allowances, No proof or any type of supporting documents are needed to claim the deduction of ₹ 50,000.
  4. Since pension is taxable under the head of Salary, any pension received by the person from his past employer shall be entitled to claim the deduction of ₹ 50,000 or pension amount, whichever is lower under section 16 of the Income Tax Act.
  5. Please note that No standard deduction is allowed in case of family pension received by the legal heirs of the deceased. The Family Pension is taxed under the head of income from other sources and a standard deduction of ₹ 15,000 or 1/3rdof un-commuted pension received, whichever is lower, is exempt from tax.
  6. Here’s how this standard deduction and tax rebate u/s 87A are going to impact the taxpayer aged below 60 years:

Note:

  1. Education cess has been increased from 3% to 4% from Assessment Year 2018-19.
  2. Tax Rebate/Tax Credit under section 87A is as follows:
  • For AY 2018-19: ₹ 2,500 for Taxable Income up to ₹ 3,50,000
  • For AY 2019-20: ₹ 2,500 for Taxable Income up to ₹ 3,50,000
  • For AY 2020-21: ₹ 12,500 for Taxable Income up to ₹ 5,00,000

Read: Changes in Rules of Partial Withdrawal from NPS (National Pension System)

Standard Deduction of 30% from Income from House Property

Individual having rental income needs to pay tax under the head of Income from House Property after deducting the municipal taxes, local authority taxes, interest on home loan (up to ₹ 2 lakhs) and a lastly standard deduction of flat 30%.

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