The standard deduction is a flat deduction allowed under Section 16 of the Income Tax Act, 1961. This deduction lowers the individual's taxable income, which in turn lowers their tax obligation. The standard deduction was previously only available to people who chose the old tax system; however, as of the current fiscal year (FY 2023–24), the benefits are also available to people who choose the new tax system, which was introduced in 2020.
Income tax is an important aspect of every individual's financial planning. It is the tax levied on the income earned by a person or a company. In India, the income tax is governed by the Income Tax Act, 1961, and its rules and regulations. Every year, the government announces various changes to the income tax rules and regulations, which impact the taxpayers. In this blog, we will discuss one such change introduced in the Union Budget 2018-19, which was re-introduction of the standard deduction of Rs. 50,000.
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A standard deduction is a fixed amount that is deducted from an individual's taxable income. It is a way of reducing the taxable income and, hence, the tax liability. Before the introduction of the standard deduction, taxpayers were allowed to claim various deductions under different sections of the Income Tax Act, such as Section 80C, 80D, 80G, etc. However, the standard deduction is a flat deduction that is available to all taxpayers, irrespective of whether they have made any investments or incurred any expenses. The standard deduction is available to all categories of taxpayers, i.e., individuals, and salaried taxpayers etc:-
The standard deduction was reintroduced in the budget of 2018-19 after a gap of nearly two decades. The government had abolished the standard deduction in the budget of 2005-06. The reintroduction of the standard deduction was a welcome move for the taxpayers as it provided them with a much-needed relief from the tax burden.
The standard deduction is a fixed amount of Rs. 50,000 for all categories of taxpayers. It means that taxpayers can claim a deduction of up to Rs. 50,000 from their taxable income. The standard deduction is available in addition to other deductions such as Section 80C, 80D, and 80G.
The standard deduction is available to all categories of individual salaried taxpayers. Self-employed individuals and HUFs have various deductions available to them, such as business expenses, depreciation, and interest paid on loans.
While the standard deduction of Rs. 50,000 has brought relief to the taxpayers, it is important to understand that it is a fixed amount and may not be sufficient for taxpayers who have incurred higher expenses. For example, if a taxpayer has incurred medical expenses of Rs. 1 lakh, he or she can claim a deduction of Rs. 1 lakh under Section 80D, in addition to the standard deduction of Rs. 50,000. Therefore, taxpayers should carefully evaluate their expenses and investments and claim deductions accordingly.
It is also important to note that the standard deduction is only available to salaried employees and pensioners. It is not available to self-employed individuals, who can claim deductions under different sections of the Income Tax Act. Moreover, the standard deduction is not applicable for calculating the tax liability of individuals who opt for the new tax regime introduced in the Union Budget 2020.
The standard deduction reduces the taxable income of the taxpayer, which, in turn, lowers the tax liability. Let's understand this with the help of an example.
Suppose Mr. A has a salary of Rs. 7,00,000 for the financial year 2022-23. He has made investments of Rs. 1,50,000 under Section 80C and has a medical insurance premium of Rs. 20,000 under Section 80D. His taxable income without the standard deduction would be:
Salary income: Rs. 7,00,000
Less: Section 80C deduction: Rs. 1,50,000
Less: Section 80D deduction: Rs. 20,000
Taxable income: Rs. 5,30,000
Now, let's see how the standard deduction impacts his tax liability.
Taxable income without standard deduction: Rs. 5,30,000
Less: Standard deduction: Rs. 50,000
Taxable income with standard deduction: Rs. 4,80,000
The tax liability for Mr. A would be:
Up to Rs. 2,50,000: Nil
From Rs. 2,50,001 to Rs. 5,00,000: 5% of (Rs. 5,00,000 - Rs. 2,50,000) = Rs. 12,500
From Rs. 5,00,001 to Rs. 7,00,000: 20% of (Rs. 7,00,000 - Rs. 5,00,000) = Rs. 40,000
Total tax liability: Rs. 52,500
As we can see from the above example, the standard deduction has reduced the taxable income of Mr. A, which has resulted in a lower tax liability
In conclusion, the standard deduction of Rs. 50,000 is a welcome relief for taxpayers, particularly salaried individuals who do not have many avenues for claiming deductions. It helps to reduce the tax burden and encourages taxpayers to comply with tax laws. However, it is essential to note that the standard deduction is just one of the many deductions available, and taxpayers should explore all the options available to them to maximize their tax savings. With the government continuously introducing new tax laws and policies, it is crucial for taxpayers to stay updated and consult with professionals to ensure compliance and maximize their tax savings.
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