Section 16 permits the following deductions:
- Standard deductions
- Entertainment allowance
- Professional Tax (Tax on employment)
For the sum taxable under the head ‘Salaries’, you have to subtract these amounts from your total salary.
- Standard deduction [Section 16(i)/(ia)]
As a salaried taxpayer, every financial year, you can claim the lower amount between the following as the standard deduction from your total salary:
- ₹50,000 (from AY 2020 – 21 onwards)
- Your salary amount
- You can claim this deduction as an exemption regardless of your actual spending. Instead of the following benefits, the government introduced this one:
- Transport allowance
- Medical allowance
What Is the Benefit of Standard Deduction on Tax for Salaried Individuals?
As part of the 2018 Union Budget, the government introduced a standard deduction to provide tax relief to salaried individuals. Later, in 2019, the finance ministry raised the limit to ₹50,000.
It was possible to claim reimbursements for work-related travel expenses and medical bills before 2018. However, those deductions were limited to income tax returns
- ₹15,000 per annum as medical allowance
- ₹1,600 per month (₹1,600 X 12 = ₹19,200 per year) as transport allowance
- Thus, the total amount you could reduce from your gross salary through such benefits was ₹(15,000 + 19,200) = ₹34,200.
Therefore, the extra tax benefit is reduced to *(50,000 – 34,200) = *15,800 with the new standard deduction.
For example, suppose your salary details are as follows:
- Basic pay: ₹5,00,000
- Dearness Allowance: ₹2,00,000
- Contributions towards EPF: ₹24,000
- Deposits in PPF: ₹50,000
- Transport allowance: ₹19,200v
- Medical allowance: ₹15,000
- Thus, your total income = ₹(5,00,000 + 2,00,000) = ₹7,00,000
- Gross total income = ₹7,00,000 – ₹(24,000 + 50,000) = ₹6,26,000
Before standard Deduction
Deductions available on your gross income: ₹(19,200 + 15,000) = ₹34,200
In this case, your taxable income would be (6,26,000 – 34,200) = 5,91,800
As per the old tax regime, your total tax outgo is:
Tax on income up to ₹2,50,000 = Nil
Tax on the amount between ₹2,50,000 and ₹5,00,000 at 5% tax rate = ₹12,500
Tax on the remaining amount at 20% tax rate = 20% of ₹(5,91,800 – 5,00,000) = ₹18,360
After standard deduction
Your taxable salary income is (6,26,000 – 50,000) = 5,76,000
Your tax liability = ₹12,500 + 20% of ₹(5,76,000 – ₹5,00,000) = ₹15,200
Hence, the standard deduction helps you to save on taxes. However, you will only be able to take advantage of it if you choose the old tax system for AY 2021-22.
In addition, your employer does not need to process any bills before you can benefit from this tax break.
Consequently, this facility eliminates complicated paperwork, making tax calculation easier.
How Does Standard Deduction Impact Pensioners?
In accordance with tax laws, pension income received from former employers is considered salary income, so pensioners are eligible for the standard deduction of $50,000 or the amount of their pension, whichever is less.
As a pensioner, you might not enjoy allowances for transport or medical expenses. Thus, with a standard deduction, you can get significant tax relief.
Is There Any Limit to Standard Deduction?
You may deduct only the standard deduction amount of *50,000, regardless of how much your gross salary is. If your gross salary is less than *50,000, you may deduct a sum equal to your salary, not more.
As an example, suppose you earn $3,000 a year in gross salary.
In addition to your salary, you receive a House Rent Allowance (HRA, which is tax-free) of 60,000.
Your Leave Travel Allowance (LTA, tax-exempt salary component) = 50,000
EPF and PPF contributions (other exemptions) = ₹1,44,000
Therefore, you earn a net salary of $46,000, which is less than $50,000.
Therefore, you can claim only a standard deduction of $46,000.
Read More:-
