The Indian government reintroduced the Standard Deduction in 2018 to simplify the tax calculation process and reduce paperwork for individuals. This fixed amount can be deducted from taxable income, reducing tax liability.
The concept of the standard deduction was initially introduced in 1974 under Section 16 of the Income Tax Act, 1961. However, it was discontinued starting from the Assessment Year 2006-07. In a significant move, the Government of India decided to reintroduce the standard deduction in 2018, targeting a specific group of individuals.
What is Standard Deduction?
Standard Deduction is a fixed amount that can be deducted from an individual’s taxable income, reducing their tax liability. It is a benefit provided by the Income Tax Department to simplify the tax calculation process and reduce paperwork. This deduction is available to all individuals, including salaried employees and pensioners, without requiring any documentation or proof of expenses.
The Standard Deduction is available under both the old and new tax regimes, but with some differences. Under the old tax regime, the Standard Deduction is available to salaried employees and pensioners and is fixed at ₹50,000. This regime allows taxpayers to also claim various other exemptions and deductions, providing more flexibility in reducing taxable income.
In the new tax regime, the Standard Deduction remains available to salaried employees and pensioners, and it is also fixed at ₹75,000 ( hiked in budget 2024). However, to avail of this deduction under the new regime, taxpayers must forgo certain exemptions and deductions, such as exemptions under Section 10 (e.g., HRA, LTA), deductions under Chapter VI-A (e.g., Section 80C, 80D), and interest on housing loans (Section 24). This trade-off aims to simplify the tax system while still offering some relief through the Standard Deduction.
New Limits for Standard Deduction
The new limits for Standard Deduction have been announced in the budget 2024, and it’s essential to understand how they impact your tax liability. The limit has been increased from Rs. 50,000 to Rs. 75,000 for individuals, including salaried employees and pensioners. This means that individuals can deduct ₹75,000 from their taxable income, reducing their tax liability. According to the Finance Minister, these revisions could enable salaried employees to save up to ₹ 17,500.
How is Standard Deduction Calculated under New Tax Regime?
The standard deduction is a fixed amount that is subtracted from an individual’s gross income to determine their taxable income. This deduction does not require any proof of expenses or investments, making it a straightforward and beneficial option for taxpayers. Here’s how it is calculated:
Step 1: Calculate Gross Total Income (Gross Salary + Other Income)
Step 2: Subtract deductions (if any)
Step 3: Subtract the standard deduction amount – Rs. 75,000
Application:
Imagine, Mr. X has an annual salary of ₹10,00,000 and he also has another income of Rs. 1,00,000. He claimed a deduction of ₹1,25,000 and ₹25,000 under different deduction heads which is applicable in the new tax regime. The calculation of standard deduction is evident through these steps:
Step 1 – Calculate Gross Total Income
₹10,00,000 ( AnnualSalary) +₹1,00,000(OtherIncome) =₹11,00,000
Step 2: Calculate Total Deductions
₹1,25,000 + ₹25,000 = ₹1,50,000
Step 3: Subtract Total Deductions from Gross Total Income
₹11,00,000 − ₹1,50,000 = ₹9,50,000 ( taxable income)
Step 4 : Subtract Standard Deduction
₹9,50,000 − ₹75,000 = ₹8,75,000
Thus, ₹8,75,000 is the taxable income, where the income tax rate is applied.
Benefits of Standard Deduction
The Standard Deduction offers several benefits, including a simplified tax calculation process and reduced paperwork and documentation. This makes it easier for taxpayers to file their taxes without the need for extensive records or receipts, streamlining the process and reducing the potential for errors.
Additionally, the Standard Deduction increases take-home pay for salaried employees and pensioners, providing them with more disposable income. By eliminating the need for documentation or proof of expenses, it encourages compliance and reduces tax evasion, making it a straightforward and effective tax benefit.
Eligibility Criteria
The Standard Deduction is available to several categories of taxpayers. This includes salaried employees, who receive a regular income from their employer, and pensioners, who draw a pension after retirement. Additionally, individuals who have income from other sources, such as interest and dividends, are also eligible to claim the Standard Deduction.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
