Standard Deduction in Salary and Pension 2018 [AY 2019-20]

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Standard deduction refers to a straight reduction of salary income up to Rs.40,000/-. [Section 16(i)(ia)]

In budget 2018, India’s government has re-introduced the standard deduction for both salaried and pensioners.

This will benefit 2.5 crores assessee and will cost Rs.8,000/- crore to the government. [Budget Speech]

In this article, we will cover all the aspects of the standard deduction and its impact on both salary and pension income.

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Effective Date

This deduction is applicable from the financial year 2018-19 i.e the Assessment year 2019-20.

Condition for getting the deduction

To get the deduction, a taxpayer should be salaried or pensioner only.

Unlike other allowances, an employer is not required to submit any bill or expense vouchers for claiming the deduction.

Maximum Deduction Limit

The maximum deduction is Rs.40,000/- only.

If a taxpayer’s income is less than Rs.40,000/- under the head “Income From Salary” and his total income exceeds Rs.2,50,000/-. Than such taxpayer can claim his total salary income as standard deduction and file tax return.

Example:

 During the financial year 2018-19, Mr.Tiwari took a job for 1 month only and received Rs.20,000/- as salary. He also earned interest incomes of Rs.3,00,000/-.

In this case, the total taxable income will be Rs.3,00,000/- only [20000+300000-20000]

Interim Bugdet 2019: This deduction has been increased to Rs.50,000/- for FY 2019-20.

Impact on the Income of a Pensioner

This deduction is most beneficial for senior citizen because they can get a straight deduction of Rs.40,000/- without any loss of previous years allowance.

Look at the example:

A senior citizen earning an equal amount of pension in both years but having different total income (taxable).

Particulars FY 2017-18 FY 2018-19
 Un-commuted pension 400000 400000
Less:
Standard deduction 0 40000
Total taxable income 400000 360000
Tax @ 5% on income above
Rs.3 lakh up to Rs.5 lakh
5000 3000
Cess @ 3% / 4% (from FY 2018-19) 150 120
Total Tax 5150 3120
Net Benefit 2030
  1. Maximum reduction in total taxable income can be Rs.40,000
  2. Assessee is a senior citizen i.e 60 yrs to 80 years.
  3. The net benefit is not fixed. It will change if we change the figures.

 
FAQ

Ques 1: Is standard deduction available on pension received from NPS scheme or LIC Jeevan Suraksha like insurance policies?

Answer: No, the standard deduction is not available in this case because it is taxable under the head Income from other Sources.

In the above case, employer-employee doesn’t exist therefore it will not be taxed under the head Income from salary and the deduction is only for salary or pension income.

 

Impact on the Income of an Employee

During FY 2017-18, employees were eligible for the deduction of transport allowance up to Rs.19,200 (1600 x 12) and medical expenditure reimbursement up to Rs.15,000/-.

For claiming the above allowances, employees were required to furnish proof of such expenses.

After the announcement of budget 2018, the standard deduction will replace both the above allowances.

However, transport allowance to the differently abled individual (Rs. 3,200/-) and reimbursement related to hospital expenses will continue. [under section 17(2)(viii)]

Look at the example:

An employee earning an equal amount of salary in both years but having different total income (taxable).

Particulars FY 2017-18 FY 2018-19
1. Gross Salary
(a) Salary u/s 17(1) 400000 400000
(b) Perquisites 120000 120000
(c) Profit in lieu of salary 0 0
(d) Total 520000 520000
Less: Allowance
Transport allowance 19200 N/A
Medical Expense reimbursement
(included in perquisites)
15000 N/A
Standard deduction N/A 40000
Total Income 485800 480000
Tax on total income
Tax @ 5% on income above
Rs.2.5 lakh up to Rs.5 lakh
11790 11500
Cess @ 3% / 4% (from FY 2018-19) 354 460
Total Tax 12144 11960
Net Benefit 184
1. The maximum reduction in total taxable income can be Rs.5,800 [40000-19200-15000]
2. The assessee is assumed to be a non-senior citizen
3. The net benefit is not fixed. It will change if we change figures.

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Note:

  1. Cess rate has been increased from 3% to 4%. This change will nullify the benefit of the standard deduction for employee and pensioner earning more than 5 lakh.
  2. The benefit will depend on the tax bracket in which an assess falls. Assessee falling under 5% tax bracket can enjoy more benefit, however assessee under 30% bracket will have to pay more taxes due to 1% increase in cess rate.

Recommended To Read: How To Save Tax on Salary

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