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Standard Deduction 2019 in Income Tax

Standard Deduction 2019 in Income Tax

Standard Deduction in the context of income tax refers to a flat rate of deduction which is based on the level of income which the law itself allows irrespective of actual expenditure. The standard deduction is enshrined in the Income Tax Act, 1961 which is amended from time to time. The standard deduction is not only allowed from salary income including pension but also from the other two heads of income which will be discussed in this article. The Interim Budget 2019 has amended the standard deduction under section 16 for 2019-20 from salary income and increased it to Rs. 50,000.

    What is the Standard Deduction?

    Under the income tax law, every person is required to pay income tax on his or her income that is earned in a financial year, unless otherwise exempt from paying tax. The tax is not levied on the gross amount of income but on the net income which is derived after deducting the expenses that are incurred in earning that income. For example, a business person earns income from the sale of goods or services. For this, he incurred expenses on the purchase of goods or services, paid salary to staff, paid office rent, etc. which are duly accounted for and then after deducting those expenses from the gross income from the sale, the income or profit is derived. This profit is considered as income under the income tax law. For claiming the expenses, the business person has to keep proper documents and records since the expenses are allowed on 'actual basis'

    It is a universal truth that no income can be earned without incurring any expenses, either directly or indirectly. In certain categories of income and to provide relief to taxpayers from maintaining documentation of actual expenses, the income-tax law has introduced the concept of 'Standard Deduction' under which deduction for expenses is allowed on a flat rate basis. The benefit of allowing expenses on a standard basis is that such deduction will be allowed irrespective of actual expenses. The standard deduction is allowed even if no expenses is actually allowed. No bills or invoices are required to be kept for claiming the deduction. The pitfall of allowing deduction on a standard basis is that the deduction will be limited to the specified limit even though the actual expenses are more than the deduction allowed on a standard basis. 

    The main advantage of standard deduction is the simplicity in its calculation. The deduction is straight forward without leaving any room to invite disputes. This also brings a salaried employee at par with business persons and professionals to some extent. 

    Expenses that are incurred by a person earning salary income - A person earning income from salary does not belong to any type of exception to the universal rule of incurring expenses for earning income. A salaried individual also incurs expenses of various nature for performing his duty and to earn salary income. Some of the notable expenses are discussed below-

    1. Expenses on transportation for commuting to office from residence.
    2. Expenses on purchasing books to keep his knowledge updated.
    3. Expenses on house rent for accommodation or interest on home loan taken for residence purpose.
    4. Expenses on medical treatment to keep himself or herself ready to keep him or her fit to do the job.
    The list is not exhaustive. there are many other expenses are incurred by a salaried individual.

    A salaried individual earning income from salary gets various type of allowances to meet the varied nature of expenses. The law has allowed exemptions either in full or in part on certain nature of allowances.  Some of the noted allowances are mentioned below-

    1. Dearness Allowance - to meet the cost of living index. It is fully taxable.
    2. House Rent Allowance - to meet the cost of accommodation. It is exempt if rent is paid for employee's accommodation.
    3. Child Education Allowance - to meet the cost of children' education of the employee. It is exempt at a flat rate of Rs 100 per month for a maximum of 2 children.
    4. Medical Allowance - to meet the medical expenses of the employee and his or her family.
    5. Conveyance allowance - to meet the transportation cost for attending office. Prior to 2018, an exemption was available at a flat rate of Rs. 1600 per month. From 2018-19, this allowance is fully taxable.
    Apart from the above, there are many other allowances which are either fully taxable or partially taxable. Certain allowances are fully exempt from the purview of income tax.

    These are allowance specific exemption that is allowed under the income tax law from the salary income.

    What is Standard Deduction from Salary Income in income tax?

    The income tax law provides standard deduction from Salary Income. The concept of standard deduction from salary income was first introduced in 1974 and was continued till AY 2005-06. However, the Budget 2005 withdrew the standard deduction. The rationale for such withdrawal as given by the then Finance Minister P. Chidambaram in his budget speech is as follows - 

    "153. Given the higher exemption limits and the scaling up of tax brackets, the need for a separate personal allowance does not exist. Therefore, in conformity with growing international practice, I propose to remove the standard deduction."

    In that budget, the basic exemption limit for the individuals was raised by Rs. 50,000 to Rs. 1,50,000 from earlier Rs. 1,00,000 and removed the standard deduction. The benefit of the increase in basic exemption limit was enjoyed by all the categories of individual taxpayers including non-salaried individuals but only the individual taxpayers felt the burn.

    However, demand from every section was raised in every year to reintroduce the standard deduction from salary income. However, in 2018 the long pending demand of salaried persons was met when the then Finance Minister Mr. Arun Jaitley reintroduced the Standard Deduction for salaried individuals from FY 2018-19 while presenting the Budget 2018, though this time also came at the cost of forgoing exemption available from transport allowance and reimbursement of miscellaneous medical expenses.

    While presenting the Budget 2018, the then Finance Minister Mr. Arun Jaitley informed the Parliament the following data.

    (Data is for Assessment Year : 2016-17)
    Number of salaried individuals who have filed their returns
    1.89 crore
    Number of individual business taxpayers including professionals  who have filed their returns
    1.88 crores
    Total Taxes Paid
    Rs. 1.44 lakh crore
    Total Taxes Paid
    Rs. 48,000 crore
    Average tax payment of per individual salaried taxpayer
    Rs. 76,306
    Average tax payment of per individual business taxpayer
    Rs. 25,753

    He further informed that income tax data analysis suggests that major portion of personal income-tax collection comes from the salaried class.

    Even we can see that a salaried individual is paying tax more than 3 times of than a business individual.

    This is why the benefit of standard deduction was given to the salaried class.

    The relevant portion of the Budget Speech of the Finance Minister while presenting the Budget for 2018-19 is reproduced below-

    "151. . . . . . In order to provide relief to salaried taxpayers, I propose to allow a standard deduction of Rs. 40,000/- in lieu of the present exemption in respect of transport allowance and reimbursement of miscellaneous medical expenses. However, the transport allowance at enhanced rate shall continue to be available to differently abled persons. Also other medical reimbursement benefits in case of hospitalization etc., for all employees shall continue. Apart from reducing paper work and compliance, this will help middle class employees even more in terms of reduction in their tax liability. This decision to allow standard deduction shall significantly benefit the pensioners also, who normally do not enjoy any allowance on account of transport and medical expenses. The revenue cost of this decision is approximately Rs. 8,000 crores. The total number of salaried employees and pensioners who will benefit from this decision is around 2.5 crores."

    The maximum amount of exemption from Transport allowance was available at Rs. 1600 per month which translates to Rs. 19,200 per annum. Further, the maximum amount of tax benefit on account of reimbursement of medical expenses was Rs. 15,000. Therefore, the net benefit given to a salaried individual computed as below-

    Amount (in Rs.)
    Maximum amount of tax exemption for Transport Allowance available
    Maximum amount of tax exemption for reimbursement of medical expenses
    Total amount of tax exemption forgone
    Maximum amount of tax exemption given for Standard Deduction
    Net Benefit given to salaried individuals by way of reduction in income

    This reduction in income translate into tax savings of Rs. 290 when the tax rate is 5 percent. It inches up to Rs. 1,160 and highest at Rs. 1,740 at 20 percent and 30 percent tax rate respectively. It is also be noted that in the Budget 2018, the cess is increased to 4 percent from 3 percent. We will see later that the increase in cess (Health and Education Cess) erases the savings in tax outgo and in the case of higher income, even tax outgo increases due to the rise in cess.
    Net Reduction or Savings in income
    Tax savings
    Rs. 5,800
    At 5% tax rate
    At 20% tax rate
    At 30% tax rate
    Rs. 290
    Rs. 1,160
    Rs. 1,740

    The above calculation holds good when an individual is getting the transport allowance and medical reimbursement from their employer. In the case of those employees, mainly those who belong to the government sector or pensioners,  there is no component of transport allowance or medical reimbursement in their remuneration or emoluments. Under such circumstances, the reduction in income is straight forward Rs. 40,000 resulting in higher tax savings.
    Net Reduction or Savings in income
    Tax savings
    Rs. 40,000
    At 5% tax rate
    At 20% tax rate
    At 30% tax rate
    Rs. 2,000
    Rs. 8,000
    Rs. 12,000

    How to compute standard deduction from income from salary? What is the rate of Standard Deduction?

    The standard deduction is allowed under section 16(ia) as 'Deduction from salaries' of the Income Tax Act, 1961 which falls under the head 'Income from Salary' and is worded as given below (as applicable from 01.04.2019)-

    "16. The income chargeable under the head "Salaries" shall be computed after making the following deductions, namely :—
    (i) [***]
    (ia) a deduction of fifty thousand rupees or the amount of the salary, whichever is less;

    The limit was Rs. 40,000 in 2018 which was increased by 25 percent or Rs. 10,000 to Rs. 50,000 in Interim Budget 2019.

    Till the assessment year 2005-06, the standard deduction was available under the clause (i). The standard deduction that was available then is as follows-

    Income from salary  before standard deduction
    Does not exceed Rs. 5,00,000
    40 percent of the salary or Rs. 30,000, whichever is less
    Exceeds Rs. 5,00,000
    Rs. 20,000

    The standard deduction as reintroduced by the Budget 2018 is included in clause (ia) although section 16 remains the same.

    The standard deduction is allowed from salary income which is derived after deducting the exempt allowances and adding all the perquisites. This gives the amount of 'Income from salary before standard deduction'. Therefrom, standard deduction and other section 16 deduction are allowed to arrive at the 'Income chargeable under the head Salary'.

    Before 2018, there was no standard deduction. From 2018-19, standard deduction was allowed from salary income and the exemption for transport allowance and reimbursement of medical expenses was withdrawn. Further, the Health & Education cess was also increased to 4 percent.

    Is pension income eligible for standard deduction?

    Standard Deduction for pensioners Pension received by an employee from his former employer(s) is taxable under the head Income from salary. The Income Tax Act provides for standard deduction up-to Rs 50,000 from 2019-20 (increased from Rs. 40,000 in FY 2018–19) as per Interim Budget 2019 from the Income chargeable under the head Salary. Pension income is taxable under the head ‘Income from Salary’, the pension holder is eligible to claim standard deduction under section 16(ia) against the pension income.

    In this regard, the CBDT has also issued a clarification on 05.04.2018 and clarified that pension income received by an employee from his former employer is eligible for standard deduction u/s 16 of the Income Tax Act,1961 for Rs. 40,000 or pension income, whichever is less. 

    It is worthy to mention that standard deduction u/s 16 can be claimed only from pension income received by the employee from his former employer. Deduction u/s 16(ia) cannot be claimed for family pension income.

    Is family pension income eligible for standard deduction?

    Standard Deduction 2019 in Income Tax

    Standard Deduction from family pension income- The Income Tax Act, 1961 defines the Family pension income as "regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death".

    Family pension income is not taxable under the head 'Income from salary' but is taxable under the head 'Income from Other Sources'. Since standard deduction u/s 16 is a head-specific deduction from 'Income from Salary', no deduction u/s 16 can be claimed from family pension income which is taxable under section 56 of the Income Tax Act, 1961 as 'Income from other sources'.

    However, a standard deduction is allowed from family pension income under section 57(iia) of the Income Tax Act, 1961 at 33 1/3 percent of family pension income or Rs. 15,0000 whichever is less. Thus the maximum amount of standard deduction available from family pension income is Rs. 15,000 against Rs. 50,000 from salary income.

    What is the standard deduction for senior citizens?

    Standard Deduction for senior citizens - In case of standard deduction, no special benefit is given to senior citizens. Senior citizens are mostly pensioners and thus they are subject to the same quantum of standard deduction u/s 16 at a maximum of Rs. 40,000 in a year. 

    Even if a senior citizen is in employment, the deduction remains the same.

    What are the other heads of income under which standard deduction is allowed under income tax law?

    Apart from 'Income from salary' and 'Income from family pension', the income tax law allows standard deduction from income chargeable under 'Income from House Property'.

    Standard Deduction 2019 in Income Tax

    The gross rental income (which is termed as 'annual value') is the income from house property. Standard deduction of 30 percent is allowed from rental income taxable under 'Income from House Property' without any maximum limit. Thus, in effect, only 70 percent of the rental income is taxed under the head 'Income from House Property'. This standard deduction is allowed towards repair, maintenance, insurance and other expenses that the owner of the house property incurs. Since the deduction is allowed on a flat rate basis, the assessee or taxpayer is not required to maintain any proof of expenses like bills, invoices, etc. Further, this deduction will be allowed even if the taxpayer did not incur any expenses or actual expenses are less than the amount determined at 30 percent of the annual value.

    The only expenses that are allowed to claim from the annual value of a house property are the municipal taxes paid to municipal authorities and interest on borrowed capital paid or payable to lenders for the acquisition or construction of the house property.

    Amount (in Rs.)
    Gross Annual Value (Rental Income)
    Less: Municipal taxes paid
    (-) 1,000
    Net Annual Value
    Less: Deduction u/s 24

    Standard Deduction at 30% on Net Annual Value
    (-) 30,000
    Interest on loan
    (-) 10,000
    Income chargeable under ‘Income from House Property’

    Besides standard deduction is allowed in case of presumptive income from business u/s 44AD or professional income u/s 44ADA. Though under these sections, the deduction is not the criteria to compute the income, the mechanism moves in the direction of computation of standard income on the presumptive rate. These are in a true sense not standard deduction but standard income.

    Under section 44AD, income at the rate of 8 percent of turnover is deemed to be the income of the taxpayer. It is reduced to 6 percent where the income is received in digital mode of payments. All other expenses are deemed to have been allowed including depreciation.

    Under section 44ADA, 50 percent of the gross professional income is deemed to be the income of the assessee or taxpayer. No other expenses are allowed and all other expenses are deemed to have been allowed including depreciation.

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    The concept and other minute details of standard deduction have been highlighted in this article. Normally standard deduction is viewed as a benefit to salaried individuals including pensioners. A salaried individual has no scope of claiming any expenses which he or she incurs for earning the salary income and the standard deduction takes care of.

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    1. The topic is explained very nicely. All queries cleared.