Standard Deduction: Under New and Old Tax Regime For Salaried Individuals
The standard deduction is a crucial tool for salaried individuals, which helps them to reduce their taxable income. With the coexistence of a new tax regime alongside the traditional one, it is important to understand how the standard deduction functions within each framework.
In this article, we will understand the standard deduction under both the old and new tax regimes. We will explore its impact on tax calculations, highlight the potential benefits under each system, and discuss which regime may be more favorable based on your specific financial situation.
Table of Contents
What is Standard Deduction?
The standard deduction is a fixed sum which is reduced from the gross income of the salaried individuals. This reduces the taxable income and the tax liability of the salaried individuals. Moreover, the standard deduction simplifies tax filing by eliminating the need to document expenses like medical expenditures and transport allowances, which were previously required.
Who can Claim Standard Deduction?
The standard deduction is available primarily to:
Salaried Employees: Individuals earning a salary from an employer, whether in the private or government sector, can claim this deduction.
Pensioners: Retirees who receive a pension also qualify for the standard deduction, acknowledging the potential for limited income and higher medical expenses in retirement.
What is the Limit of Standard Deduction on Salary?
The standard deduction is available primarily to:
Salaried Employees: Individuals earning a salary from an employer, whether in the private or government sector, can claim this deduction.
Pensioners: Retirees who receive a pension also qualify for the standard deduction. Thereby acknowledging the potential for limited income and higher medical expenses in retirement.
Purpose of Standard Deduction
The main purpose of the standard deduction are to:
Simplify Tax Filing: Because of standard deduction, a flat deduction is allowed without the need for maintaining detailed records of various employment-related expenses.
Reduce Tax Burden: Due to standard deduction, the tax burden is lowered on salaried individuals and pensioners, by reducing their taxable income.
Compensate for Work-Related Expenses: Though it does not require proof of expenditure, the standard deduction is meant to account for various work-related expenses that employees incur.
Promote Equity: Standard deduction provides uniform tax relief to all employees and pensioners, helping to even out tax treatment across different income levels.
How does Standard Deduction Reduce Taxable Income?
Let’s take an example to understand how does standard deduction reduce the taxable income:
Assume Ms. Neha, a salaried employee, earns a gross salary of INR 20 Lakh. Here is how the standard deduction will affect her taxable income:
If Ms. Neha falls under the 30% tax bracket, the tax savings due to standard deduction is computed as below:
Tax Savings = Standard Deduction * Tax Rate
Tax Savings = INR 50,000 * 30%
= INR 15,000
Thus, Ms. Neha can save INR 15,000 due to standard deduction.
Standard Deduction and the New Tax Regime
The new tax regime introduced in the 2020 budget initially did not offer a standard deduction. However, with the 2023 budget amendment, a standard deduction of INR 50,000 is now extended to both salaried individuals and pensioners under this regime. This change makes the new tax regime more appealing by allowing a fixed deduction, which helps broaden its attractiveness among taxpayers.
Standard Deduction for Pensioners
Like salaried individuals, pensioners can also take the benefit of standard deduction. They can deduct INR 50,000 from their total pension income, which reduces their taxable income and, consequently, their tax liability. This simplifies the tax filing process for retirees by acknowledging their non-working income status and providing necessary tax relief.
Documents Required for Claiming Standard Deduction
One significant advantage of the standard deduction is that it does not require any documentation to claim. Unlike other deductions that might require proofs like medical bills or travel expenses, the standard deduction is automatically applied to the gross salary or pension income. There’s no need for receipts, bills, or other documents, which significantly simplifies the tax filing process.
Calculation of Standard Deduction with Multiple Employers
When an individual has multiple employers within a financial year, careful calculation of the standard deduction is crucial to ensure correct application. Here's how it works:
Claiming Standard Deduction from Each Employer: An individual can claim the standard deduction of INR 50,000 from each employer. However, the total deduction claimed across all employments should not exceed INR 50,000 per financial year.
Employer’s Responsibility: Each employer will typically calculate Tax Deducted at Source (TDS) assuming eligibility for the standard deduction, without awareness of other employment. This might result in an excess deduction if the cumulative standard deduction from all employers exceeds INR 50,000.
Adjusting During Tax Filing: If the total standard deduction availed from multiple employers exceeds the permissible limit, an individual needs to adjust this when filing the income tax return. It’s important to ensure that the total income reported and the total standard deduction claimed across all employers do not exceed the set limits.
Example:
Suppose Mr. Amit worked with two different employers in a financial year:
Employer A (Jan to June): Salary received is INR 6,00,000.
Employer B (July to Dec): Salary received is INR 6,00,000.
Both employers might apply a standard deduction of INR 50,000 each while calculating TDS, leading to a total standard deduction of INR 1,00,000 being applied.
However, the permissible limit is INR 50,000. Mr. Amit would need to adjust this while filing the income tax return to ensure only INR 50,000 is claimed as the standard deduction.
Steps to Take:
Review Form 16: Check the Form 16 from each employer to see how much standard deduction each has applied.
Calculate Total Income: Add up the income from all employers.
Apply Standard Deduction Correctly: Ensure that the standard deduction on the income tax return does not exceed INR 50,000 in total, even if more was deducted by employers.
File Accurate Return: Adjust the taxable income accordingly when filing the income tax return to reflect the correct standard deduction.
Other Deductions from Salary
In general salaried individuals can take advantage of following deductions and exemptions apart from the standard deduction:
Deductions for Salaried Employees:
Entertainment Allowance: This is available only to government employees and is deducted from gross salary.
Professional Tax: This tax paid by an employee can be claimed as a deduction from salary income.
Common Deductions Available to All Taxpayers (Including Salaried Employees): Under Section 80C, 80D, 80E, 80G, 80TTA, and Section 80GG.
Exemptions Specifically Allowed for Salaried Employees:
House Rent Allowance (HRA): Exemption based on rent paid, salary, and location of residence.
Leave Travel Allowance (LTA): Exemption for expenses on travel during leave, applicable to two journeys in a block of four years.
Transport Allowance: For expenses related to commuting between home and work.
Children Education Allowance: Exemption for expenses on children's education.
Hostel Expenditure Allowance: For expenses related to children's hostel fees.
FAQ
Q1. Explain standard deduction in the context of Income Tax.
The standard deduction is a flat amount that salaried employees and pensioners can deduct from their income before income tax is calculated, reducing their taxable income.
Q2. How much standard deduction is allowed to salaried employees?
Salaried employees can claim up to INR 50,000 as a standard deduction from their salary. Even pensioners can claim the standard deduction if they receive pension income.
Q3. Can senior citizens also claim standard deduction from their salaried income?
Yes. Standard deduction is allowed to all salaried taxpayers and pensioners irrespective of their age. Thus, senior citizens can also claim standard deduction from their salaried income which is usually in the form of pension.
Q4. Is an individual required to submit the proof to claim standard deduction?
No. The individual is not required to submit any proof to claim standard deduction. It is a flat deduction allowed under the Income Tax Act.
Q5. Apart from standard deduction, can a salaried employee also be eligible to claim other deductions?
Yes. A salaried employee can claim deduction under Chapter VI-A of the Income Tax Act and other exemptions allowed under the Act, which is over and above the flat standard deduction.
Q6. If there is a change in employment, how can a salaried individual claim the standard deduction?
In case of change in employment, the salaried individual can claim the standard deduction of INR 50,000 in total toward all the employers. The standard deduction is allowed per financial year and not on an employer basis.
Q7. Can a self-employed individual be eligible to claim standard deduction?
No. A self-employed individual does not receive salary income and thus cannot claim standard deduction.
Q8. Are central and state government employees eligible for claiming standard deduction?
Yes. The employees of central and state governments are also eligible to claim standard deduction from their salaried income.
Q9. What is the maximum limit of income on which a salaried employee can claim standard deduction?
There is no maximum limit on the salary income to become eligible for claiming standard deduction. Instead, a salaried employee can claim standard deduction of INR 50,000 in each financial year while filing their ITR .
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