Standard Deduction

What is Standard Deduction?

The standard deduction is a flat amount deducted from your taxable income, reducing the amount of income on which you're taxed. This deduction is available to all salaried individuals, regardless of their salary amount or other deductions they may claim.

Finance Minister Nirmala Sitharaman, in the 2024 Budget, announced a rise in the standard deduction for salaried individuals from ₹50,000 to ₹75,000, providing additional relief for salaried taxpayers.

How Standard Deductions Work?

The standard deduction is a simplified way for salaried individuals to reduce their taxable income. Before its reintroduction in 2018, employees had to claim specific allowances like travel and medical reimbursements, which required documentation and adhered to certain limits.

The standard deduction streamlines this process:

1. Fixed Amount Deduction:

   • A fixed amount is deducted from your gross income.

   • For the current financial year, this amount is ₹75,000 under the new tax regime.

2. Reduced Taxable Income:

   • The standard deduction is subtracted from your gross income.

   • This lower amount becomes your taxable income.

3. Lower Tax Liability:

   • With a reduced taxable income, you pay less tax.

Example:

• Gross Annual Salary: ₹10,00,000

• Standard Deduction: ₹75,000

• Taxable Income: ₹9,25,000

By reducing your taxable income to ₹9,25,000, your overall tax liability decreases.

What are the Benefits of Standard Deduction?

Below are the benefits of income tax standard deduction:

• Simplifies Tax Filing: The standard deduction reduces the need for multiple documents, such as medical and transport receipts, making tax filing simpler for salaried employees.

• Lowers Taxable Income: By deducting a fixed amount from gross income, it directly lowers taxable income, which can reduce the overall tax payable and ease the financial burden on employees.

• Automatic Eligibility: Salaried individuals don’t need to apply for the standard deduction or meet specific criteria, as it is automatically available, ensuring a hassle-free process.

• Provides Consistent Relief: Unlike specific deductions subject to limits, the standard deduction offers a reliable, consistent tax benefit that salaried individuals can count on each year.

• Encourages Efficient Tax Planning: With this straightforward deduction, employees can plan their finances better, knowing they have a guaranteed reduction in taxable income.

Eligibility Criteria for Income Tax Standard Deduction

According to Section 16 of the Income Tax Act 1961, the standard deduction is available only to salaried individuals, including salaried professionals and retired individuals. These taxpayers can claim the deduction regardless of their annual income, provided they have chosen the old tax regime.

1. Who is Eligible?

   • Salaried employees

   • Salaried professionals

   • Retired individuals who have opted for the old tax regime

2. Who is Not Eligible?

   The following taxpayers cannot claim the standard deduction under Section 16 for FY 24-25:

   • Self-employed individuals

   • Taxpayers who have opted for the new tax regime

   • HUF (Hindu Undivided Family) and other institutional or non-individual taxpayers, regardless of the tax regime

What is the Impact of Standard Deduction on Individuals?

The standard deduction provides a straightforward tax-saving benefit for salaried employees and pensioners by lowering taxable income without complex calculations or additional documentation. Since no proof is required, individuals can reduce their tax burden with minimal paperwork, making it both convenient and efficient.

Another advantage is that the standard deduction can be used alongside other popular tax-saving sections like 80C (investments), 80D (health insurance), 80TTA (savings account interest), 80TTB (senior citizens’ interest income), Section 24 (home loan interest), and more. However, to claim the full range of these deductions, taxpayers must choose the old tax regime. This approach allows individuals to optimize tax savings without sacrificing other tax benefits, enhancing their overall tax efficiency.

Conclusion

The standard deduction offers a straightforward and accessible tax relief option for salaried employees and pensioners. Reducing taxable income and complementing other popular deductions provide a comprehensive benefit that promotes efficient tax planning. The standard deduction remains an effective way for individuals to lower their tax liabilities and enjoy greater financial flexibility.