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Standard Deduction under Section 16(ia): What Salaried Individuals Should Know


Standard Deduction under Section 16(ia): What Salaried Individuals Should Know


In addition to laying out procedures for taxing people's income, the Income Tax Act allows a variety of avenues for claiming refunds and deductions. The amount of the deductions is determined by how the individual uses their money. The standard deduction is one such deduction available to those on salaries. As you are aware, taxpayers do not need to invest or spend any money to claim a particular amount under the standard deduction. This applies to salaried individuals and pensioners. After being removed for several years, the provision was reinstated in 2018 with the introduction of the budget. Here is all the information that salaried individuals need to know about the standard deduction.

 

Table of Content

 

What is the Standard Deduction under Section 16(ia)?

The standard deduction under section 16ia of the Income Tax Act permits salaried employees to reduce their taxable income. The Indian Finance Minister established the standard deduction under 16(ia) in the 2018 budget. The annual transportation allowance of Rs 19,200 and the medical allowance of Rs 15,000 were substituted by the standard deduction under 16(ia). The standard deduction under section 16(a) was Rs 40,000 till the 2019 budget raised it to Rs 50,000.

The medical and transportation allowances are been replaced with a tax deduction of Rs 50,000 under section 16(ia), which is the standard deduction. The standard deduction offers a flat standard deduction from the taxable income rather than requiring the taxpayer using it to furnish any documentation proving an expenditure of Rs 40,000. 

All salaried people, including pensioners, are eligible for the standard deduction, which is applied regardless of the actual amount of pay received. The standard deduction, however, is limited to the employee's annual wage. Moreover, the taxpayers are not permitted to take the standard deduction in addition to any additional Section 16 deductions, such as the conveyance allowance or HRA.


Purpose of Standard Deduction

The following goals are intended to be attained by implementing standard deduction: 

  • Reduce paperwork and allow deductions irrespective of actual expenses to streamline tax filing.

  • Provide tax breaks exclusively to middle-class wage earners.

  • Increase pensioners' benefits by using the standard deduction.


Eligibility for a Standard Deduction

Individuals who receive a salary and pension, but who do not own businesses, can claim the standard salary deduction. This means that anyone whose income falls below the head salary is eligible to claim a standard deduction of up to Rs 50,000. However, the standard deduction will not be applicable in the following situations: 

  • Married individuals filing separately if one partner claims itemised deductions

  • Taxpayers who, for a given financial year, held dual status or were non-resident aliens

  • Taxpayers who submit returns for a time frame shorter than a year


Documents Required for Standard Deduction

The standard deduction for salary income can be claimed without the need for supporting documentation. However, to file income tax returns, you must fill out the required forms and supply the following documentation: 

  • Bank records for the pertinent financial year

  • Statements of income from fixed deposits or interest

  • Certification for TDS (Tax Deducted at Source)

  • Investment-related paperwork

  • Forms AIS and 26AS


Standard Deduction under Section 16(ia) in New Tax Regime

The new tax system was established in Budget 2020. The taxpayers can choose to pay reduced tax rates under this new system. However, under this new system, significant exemptions and discounts are prohibited. An amendment to Budget 2023 made it possible to claim a standard deduction of Rs 50,000 under the new system as well. As a result, you can now claim the standard deduction of Rs 50,000 under both the old and new regimes. Beginning in FY 2023–2024, salaried taxpayers are qualified for the standard deduction of Rs. 50,000 under both the old and new tax regimes. Budget 2024 has not been updated.


Standard Deduction under Union Budget 2018

In Budget 2018, Finance Minister Arun Jaitley gave the salaried class cause for celebration by introducing a standard deduction of Rs. 40,000. It took the place of the annual medical reimbursement of Rs. 15,000 and the transport allowance of Rs. 19,200.  It's interesting to note that Standard Deduction was offered earlier. Nevertheless, the Finance Act of 2005 eliminated it. Typically, the standard deduction is claimed as a deduction after being subtracted from the gross pay. Whatever their category or investment requirement, all salaried employees are eligible to claim this deduction. 

Many tax advantages for middle-class and salaried individuals were included in the interim budget that was released on February 1, 2019. One of the most notable changes is the addition of Rs. 10,000 (up from Rs. 40,000) to the Standard Deduction. The current Standard Deduction of Rs 50,000 will greatly assist people in lowering their tax liability. Let us explain this using an example:


Standard Deduction under Union Budget 2018


Evidently, the taxable income of salaried individuals has decreased after the new provisions.


Standard Deduction for Senior Citizens

According to Indian law, people between the ages of 60 and 80 are considered senior citizens, a designation that carries specific rights and obligations. In particular, a pension is a stipend or recurring payment made to people—particularly senior citizens—in recognition of their prior service. According to the Indian Taxation System, pensions that elderly individuals get from their previous employment are taxable and fall under the "salaries" category. This suggests that senior citizens must abide by tax laws that are relevant to their wage income. 

Pensioners are assisted under Section 16 of the Income Tax Act, which permits them to deduct up to Rs. 50,000 per year or the actual amount of their pension, whichever is lower. This provision serves two purposes: it acknowledges the financial difficulties older adults encounter and offers a way to lessen their tax burden. It's important to highlight that older persons' financial burden has been considerably reduced by the return of standard deduction. Before determining the taxable income, a predetermined sum known as the standard deduction is subtracted from the overall income. This measure improves senior individuals' overall financial well-being in addition to streamlining the tax calculating procedure. 


Conclusion

Deductions let you cut down on the amount of income that is subject to taxes, acting as financial shortcuts. The standard deduction is one important element in this money-saving strategy. Rather than getting bogged down in the minutiae of listing every expense, the standard deduction provides an easy way to reduce your taxable income. 


FAQ

Q1. Which section of the Income Tax Act covers the standard deduction?

Standard deduction is covered by Section 16(ia) of the Income Tax Act. 


Q2. What is the Standard Deduction under u/s 16(ia)?

Standard deduction refers to a fixed deduction for people who choose to remain under the Old Tax Regime and receive a salary or pension. It was first proposed in Budget 2018 as a replacement for the payment of certain medical expenses and the exemption from transport allowance. The standard deduction cap for FY 2022–2023 is Rs 50,000. 


Q3. Who can claim a standard deduction?

Current regulations outlined in Section 16 of the Income Tax Act, 1961 limit the application of the standard deduction to salaried workers, including retired people and salaried professionals


Q4. Should I claim the standard deduction? 

Generally speaking, the standard deduction is the best option for most taxpayers. Adopting the standard deduction will help taxpayers whose total itemised deductions (depending on their filing status) are less than the standard deduction.


Q5. What is the standard deduction for FY 2024-25?

Since the Interim Budget for this year had no modifications, the standard deduction for the fiscal year 2024–2025 is unaltered. It will remain at Rs 50,000 under the previous tax system as well as the current one.


Q6. How is standard deduction u/S 16(ia) calculated?

According to section 16(ia) of the Income Tax Act, 1961, the standard deduction is a one-time payment of Rs. 50,000 or the salary, whichever is lower. The Indian government implemented it in the 2018 Union Budget, taking the place of the previous deductions for medical and travel expenses.


Q7. Is standard deduction available to senior citizens?

Yes, regardless of age, all salaried taxpayers and pensioners are eligible for the standard deduction.


Q8. What is the limit of standard deduction?

The fixed limit for standard deduction is Rs. 50,000, regardless of the annual income.


Q9. Can I claim the standard deduction even if my income exceeds Rs 5,00,000?

No matter how much money you make, you are still eligible for the basic salary deduction. If you receive a wage, you will receive the benefit. In this instance, the pay amount is unimportant.


Q10. Can an employee claim both standard deduction & income tax deduction?

Yes, an employee is eligible to claim income taxes in addition to the standard deduction.


Q11. Is the standard deduction calculated monthly?

Salary deductions, often known as the standard deduction, are not computed on a monthly basis. While submitting your ITR for the assessment year, you are permitted to deduct a single amount.


Q12. Can employees of the Central or State Government claim the standard deduction?

Yes, employees of the federal or state governments are eligible for the standard deduction.


Q13. Is a standard deduction available for self-employed in India?

Self-employed individuals do not receive a salary. Their business brings in money. Because the standard deduction can only be deducted from pay income, self-employed people are unable to claim it.


Q14. Can I claim the standard deduction if I have income from freelancing?

No, standard deduction is only applicable to those who receive salary as their source of income. Freelancing income is not deductible under the standard deduction since it is seen as revenue from a business or profession.


Q15. Is standard deduction under section 16 applicable to a person having interest from FDs as the only source of income?

No, standard deduction is not accessible on income from other sources; it is only available on salary and pension income.


Q16. How can I claim deductions not accounted for by the employer in Form 16?

If your employer does not account for a deduction, you may claim it when filing your income tax return, as long as you are qualified to do so. 


Q17. Can I claim medical allowance and transport allowance while claiming the standard deduction?

No, you are only eligible to deduct the standard deduction of Rs. 50,000; the transportation and medical allowances are not.


Q18. Do I need receipts or supporting documentation to claim a standard deduction?

The Standard Deduction is a one-time deduction of Rs. 50,000 that can be taken out without a receipt or any supporting documentation.


Q19. Is a standard deduction a mandatory component to build a pay scale?

It is not required to have a standard deduction stated on your payslip or pay scale to be eligible for its benefits. At the time of electronic filing, you can immediately benefit from it. If you have chosen to use the Old Tax Regime, you can also benefit from the standard deduction on Form 16. Under the new tax regime, the standard deduction is not accessible. Salaried taxpayers are now eligible for a basic deduction of Rs. 50,000 under the new tax regime starting in the financial Year 2023–2024, as per Budget 2023.




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