Standard Deduction for Salaried Employees: How It Works
The standard deduction for salaried employees is a significant tax provision that simplifies the process of claiming deductions by replacing itemized deductions. Introduced in its current form in Budget 2018, this deduction benefits millions of salaried individuals by reducing their taxable income.
In this blog, we’ll explain the concept of standard deduction, how it works, its eligibility criteria, and its implications under the old and new tax regimes.
What Is Standard Deduction?
Standard deduction refers to a fixed amount that salaried employees and pensioners can deduct from their income without requiring any supporting documents. It is aimed at covering expenses such as travel and medical costs, which were previously claimed under separate allowances.
Standard Deduction: Key Features
- Amount Allowed: As per current rules, salaried employees and pensioners can claim a deduction of ₹50,000 per annum from their gross salary or pension income.
- Automatic Deduction: It is applied automatically when calculating taxable income; employees do not need to provide proofs or bills.
- Eligibility:
- Salaried individuals receiving income under the “Salaries” head.
- Pensioners receiving a pension, as pensions are treated as “Salaries” for tax purposes.
Standard Deduction Under Old vs. New Tax Regime
Old Tax Regime
- Standard deduction of ₹50,000 is allowed, reducing the taxable income.
- Employees can also claim other deductions and exemptions like HRA, LTA, Section 80C benefits, etc.
New Tax Regime (Section 115BAC)
- Standard deduction is not allowed.
- Taxpayers opting for the new tax regime must forego this benefit along with other exemptions and deductions.
How Standard Deduction Works: Examples
Example 1: Salaried Employee Under Old Tax Regime
- Gross Salary: ₹8,00,000
- Standard Deduction: ₹50,000
- Other Deductions (e.g., Section 80C): ₹1,50,000
- Taxable Income: ₹8,00,000 – ₹50,000 – ₹1,50,000 = ₹6,00,000
Example 2: Salaried Employee Under New Tax Regime
- Gross Salary: ₹8,00,000
- No Standard Deduction or other exemptions.
- Taxable Income: ₹8,00,000
In this case, the old regime offers a tax advantage due to the availability of deductions, including the standard deduction.
Advantages of Standard Deduction
- Ease of Compliance: No need for maintaining proofs or bills for claiming the deduction.
- Universal Applicability: Available to all salaried individuals and pensioners irrespective of their job role or salary amount.
- Reduces Taxable Income: Helps lower the overall tax liability for individuals under the old tax regime.
Frequently Asked Questions
1. Is the standard deduction applicable to pensioners?
- Yes, pensioners can claim a standard deduction of ₹50,000 from their pension income as per Section 16 of the Income Tax Act.
2. Can I claim the standard deduction under the new tax regime?
- No, the new tax regime under Section 115BAC does not allow the standard deduction.
3. Do I need to submit any proof to claim the standard deduction?
- No, the standard deduction is applied automatically during income calculation.
4. Has the standard deduction amount changed in recent years?
- The standard deduction was increased to ₹50,000 in Budget 2019. It remains the same as of the latest updates.
Conclusion
The standard deduction of ₹50,000 is a valuable benefit for salaried employees and pensioners under the old tax regime. It simplifies tax compliance while providing financial relief. However, individuals opting for the new tax regime must weigh the benefit of this deduction against the lower tax rates offered in the new regime. Evaluating both regimes can help taxpayers minimize their tax liability and make the best financial choice.
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