The Income Tax Act, not only charges taxes on your income but also allows you multiple ways to claim deductions and rebates. One such deduction that is particularly allowed only to salaried people is the standard deduction.
The standard deduction is allowed under section 16 (ia) of the Income Tax Act introduced in budget 2018. The standard deduction replaced two allowances –
- Transport allowance of Rs 19,200 &
- Medical reimbursement of Rs 15,000
The government provided for a standard deduction of Rs 40,000 as a substitute for transport allowance and medical reimbursement. In Budget 2019, the deduction amount was increased to Rs. 50,000 from Rs. 40,000.
The best part is that in this deduction of Rs 50,000 you don’t require to submit any bill or proof of the expenditure.
Who Can Claim Standard Deduction
Two types of taxpayers can claim the standard deduction under Section 16 (ia) –
- Salaried person
- Pensioners
Since the pension is taxable income that comes under the head ‘Income from Salary’, a standard deduction of INR 50,000 is allowed to pensioners per financial year.
The amount of deduction available under section 16(ia) can be equivalent to the salary received or Rs 50,000 whichever is lower.
For example, if you earn a salary of Rs. 40,000 in a financial year, then the standard deduction would be Rs. 40,000 only. However, if your annual salary or pension is Rs. 4 lakh, the standard deduction would be Rs. 50,000 and the taxable salary would become INR 3.5 lakh.
Note – The standard deduction is separate from the rebates u/s 80C or any other section of Chapter VIA.
Advantage of Standard Deduction Under Section 16(ia)
Standard Deduction u/s 16(ia) allows you to save some extra money on your taxable income. I am comparing both scenarios that were used before SD of Rs. 50,000 allowed for taxpayers with the present standard deduction clause.
This will help you understand how the new clause helps you save extra money on taxes because you have more amount to deduct from your gross income (earlier it was Rs. 34,200) which has been increased to Rs. 50,000 in 2019.
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#2. Tax Payable After Applying Standard Deduction on Salary
| Salary Portion | Amount (in Rs.) |
| Basic Pay | 8,00,000 |
| DA | 3,00,000 |
| EPF | 60,000 |
| PPF Investment | 120000 |
| Total income | (8,00,000 + 3,00,000) = 11,00,000 |
| Gross total income | 11,00,000 – (60000+ 120,000) = 9,20,000 |
Standard deduction u/s 16(ia) on your gross income | 50,000 |
| Thus, your taxable income | (920000 – 50,000) = 8,70,000 |
Let’s calculate the payable tax on your salaried income with the Standard Deduction u/s 16(ia) method.
| Income Tax Slab (in Rs.) | Tax rates as per new regime |
| 0 – 2,50,000 | NIL |
| 2,50,001 – 5,00,000 | 5% of 2,50,0000 = 12,500 |
| 5,00,001 – 7,50,000 | 10% of total income exceeding 5,00,000 = 25,000 |
| 7,50,001 – 10,00,000 | 15% of total income exceeding 7,50,000 = 18,000 |
| Payable tax amount after standard deduction on salary | 18,000+25,000+12,500 = 55,500 |
As you can now see, with the new standard deduction you can save extra Rs. 2,370 (57,870 – 55,500) from the payable tax amount if you have a similar income structure as mentioned in the above example.
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Conclusion
You can utilize Rs. 50,000 by applying the standard deduction u/s 16(ia) of the Income Tax Act 1961 on your gross income.
That will help you easily save some money on taxes while filing the ITR by using above discussed deductions.