The Budget 2023-24 has extended the benefit of standard deduction on salary under Section 16 of the Income Tax Act, 1961, to those taxpayers who opt for the new tax regime offered under Section 115 BAC.
“For the salaried plus pensioners, including family pensioners, the benefit of standard deduction has been extended to the new tax regime. Each salaried person with an income of Rs 15.5 lakh or more will stand to benefit by Rs 52,500,” finance minister Nirmala Sitharaman said in her Budget Speech of 2023-24. This benefit was only available to people paying taxes under the old regime.
CBDT clarification on standard deduction
In a post-Budget clarification that standard deduction has been made available in the new regime to all salaried taxpayers, CBDT chairman Nitin Gupta said: “There are about 3.5 crore salaried taxpayers in India, and every salaried taxpayer will be at par with the old regime if they opt for the new regime because the standard deduction has been made available in the new regime… so, in terms of parity it has been established,” Gupta told news agency PTI.
“Considering that standard deduction will be available to salaried taxpayers in the new regime, effectively a salaried employee with an income of Rs 7.50 lakh would not be required to pay any tax,” he added.
Since this benefit will now open to all taxpayers in India, it is important to understand what standard deduction is, and how does it help a taxpayer.
What is standard deduction?
A Standard Deduction is that part of your income which is not subject to tax. This amount can be used to reduce your tax liability.
“Standard deduction refers to the amount that is not subject to tax, apart from the basic exemption limit already provided to the taxpayer. The taxpayer can simply deduct the standard deduction amount from their income,” says Nikhil Varma, managing partner, MVAC.
The standard deduction is usually deducted from your gross salary, without any requirement to submit any investment proof.
Standard Deduction in Budget 2018
In the Interim Budget presented on February 1, 2018, finance minister Arun Jaitley replaced the transport allowance of Rs 19,200 and medical reimbursement of Rs 15,000 per annum with a standard deduction of Rs 40,000.
Standard Deduction in Interim Budget 2019
In the Interim Budget 2019, an additional amount of Rs 10,000 was added to the existing amount, increasing the Standard Deduction to Rs 50,000.
Standard Deduction in Budget 2023-24
In the Budget 2023-24, the benefit of the Standard Deduction was also extended to taxpayers opting for the new tax regime. The deduction amount under the new regime is also higher at Rs 50,000.
Standard deduction under new tax regime
The new tax regime permits a standard deduction of Rs 50,000 for salaried persons with annual salary of Rs 15.5 lakh or above, according to the Budget 2023-24.
Standard deduction under old tax regime
The new tax regime permits a standard deduction of Rs 5,000 for salaried persons with annual salary of Rs 15.5 lakh or above, according to the Budget 2023-24.
Does standard deduction include basic exemption limit?
No, the standard deduction of Rs 50,000 is over and above the basic exemption limit available to a taxpayer.
This means that if you have to pay tax on, say, Rs 3 lakh after the basic exemption limit, you will actually be paying taxes on Rs 2.50 lakh only under the old tax regime, factoring in the Standard Deduction of Rs 50,000. In case of new tax regime, too, your taxable salary will be Rs 2.50 lakh, factoring in Rs 50,000 deduction.
Who can claim standard deduction on salary?
This deduction can be claimed by all salaried employees as well as pensioners.
Standard deduction on salary versus standard deduction on rent
While the Standard Deduction on salary is made available under Section 16 of the income tax law, the Standard Deduction on Rental Income is provided for under Section 24 of the Act.
Eligible criteria for income tax standard deduction
Standard deduction is available to everyone generating a salary in India. The standard deduction benefit is available in both new and old tax regimes. It is offered in the form of a flat deduction on salary earned by an individual during one financial year. this deduction can be claimed by all salaried employees irrespective of category and need of any investment.
Purpose of standard deduction
The purpose of this provision is to reduce paperwork and cut hassle. With this section, taxpayers can claim up to a certain limit of deductions without having to produce the proof.
Impact of standard deduction on individuals
This provision helps simplify the tax filing process by reducing the need for taxpayers to maintain detailed records and receipts of expenses.
How to claim the standard deduction?
Standard deduction is deducted from the gross salary and claimed as an exemption. All taxpayers can claim the benefit of standard deduction while furnishing their tax return in ITR1/ITR2.
How to calculate standard deduction with example?
For FY23, here’s how salaried individuals can calculate the standard deduction:
| Particulars | Net taxable income |
| Salary | Rs 10 lakh |
| House rent allowance | Rs 1 lakh |
| Leave Travel allowance | Rs 1 lakh |
| Net salary | Rs 8 lakh |
| Deductions | |
| Standard deduction of Rs 50,000 | |
| Income taxable under the head Salary’ | Rs 7.50 lakh |
Standard deduction for taxpayers receiving pension
For FY23, here’s how a pensioner can calculate the standard deduction:
| Particulars | Net Taxable income |
| Pension | Rs 7 lakh |
| House rent allowance | – |
| Leave Travel allowance | – |
| Net salary | – |
| Deductions | |
| Standard deduction of Rs 50,000 | |
| Income taxable under the head ‘salary’ | Rs 6.50 lakh |
Documents to claim Standard Deduction
To claim the standard deduction for salary income, no supporting documents are necessary. However, when filing income tax returns, you’ll need to furnish the following documents and fulfill the requisite forms:
- Bank statements covering the relevant financial year.
- Statements of income from interest or fixed deposits.
- Certificates of TDS (Tax Deducted at Source).
- Investment-related documents.
- Form 26AS and Form AIS
FAQs
What is the Standard Deduction amount in the old tax regime?
The Standard Deduction amount is Rs 50,000 in the old tax regime?
What is the Standard Deduction amount in new tax regime?
The Standard Deduction amount is Rs 50,000 in the new tax regime.
When was the Standard Deduction abolished?
The Standard Deduction, which was earlier available to taxpayers, was abolished in the Finance Act 2005.
When was Standard Deduction reintroduced?
The Standard Deduction was reintroduced in Budget 2018.
Do I have to show investment proof to claim standard deduction?
No, you don’t have to show any investment proof to claim standard deduction.
Can I claim transport allowance and medical allowance along with the standard deduction?
No, you can claim only standard deduction. The transport and medical allowances are no more separately available.
When was the standard deduction limit increased to Rs 50,000?
In 2019, the then finance minister Piyush Goyal increased the standard deduction limit increased to Rs 50,000.
Under what Section the standard deduction offered?
The standard deduction is offered Section 16 of the Income Tax Act.
What is the Standard Deduction limit in a financial year?
The Standard Deduction limit is Rs 50,000 a in a financial year under the old tax regime. The Standard Deduction limit is Rs 50,000 a in a financial year under the new tax regime.
