In the Union Budget 2018-19, the Finance Minister has proposed to provide Rs 40000 Standard Deduction from salary income to all employees & pensioners.
As per the Tax rules that are applicable for FY 2017-18 (AY 2018-19) ;
- A Salaried individual can claim annual Transport allowance (conveyance allowance) of up to Rs 19,200 (Rs 1,600 pm) and up to Rs 38,400 (Rs 3,200 pm) by differently-abled persons.
- The Salaried can also claim up to Rs 15,000 (Rs 1,250 pm) medical reimbursement. To claim this, you would have been submitting medical bills to your employer and getting the allowance benefit.
- These allowances are part of Section 10 of the Income Tax Act.
You can find these allowances listed under Part-B of your Form-16, as shown in the below image.
With effective from FY 2018-19, a standard deduction of Rs 40,000 in lieu of travel and medical allowances has been proposed for salaried employees and pensioners.
However, the transport allowance at enhanced rate (i.e., Rs 3,200 pm) shall continue to be available to differently-abled persons. Also, other medical reimbursement benefits in case of hospitalization etc., for all employees shall continue.
What is Standard Deduction? How to claim Rs 40000 Standard Deduction?
A Standard Deduction is nothing but a fixed amount of deduction. There are two types of Standard deductions that are now allowed in FY 2018-19 / AY 2019-20.
- An amount of Rs 40,000 which can be reduced by taxpayers receiving salary or pension income, from their gross salary. A similar provision of Standard Deduction from Salary Income was earlier available but was abolished in the Finance Act 2005 (new provision as per Budget 2018-19).
- Standard Deduction @ 30% can be reduced from ‘Income from Rent receivables’ under the head ‘Income from House property‘ (existing provision).
How to claim a standard deduction of Rs 40k?
To claim this standard deduction, there is no need to submit any bills to your employer(s) or the IT department.
As per this new provision, irrespective of amount of taxable salary the assessee will be entitled to get a deduction of Rs.40,000 or taxable salary, whichever is less.
Thus suppose if a person has worked for few days (or) months and his salary was just Rs 40,000 in current financial year, then he/she will be entitled to a deduction equal to salary being the same amount.
If his salary is less, say Rs 30,000 the deduction shall be restricted to Rs 30,000. If salary exceeds amount of Rs 40,000, the deduction shall be restricted to Rs 40,000.
So, ideally your Form-16 will reflect a fixed deduction of Rs 40,000 in lieu of Conveyance and Medical allowances w.e.f AY 2019-20.
How much Tax can be saved with a Standard deduction of Rs 40,000?
A standard deduction of Rs 40,000 from your salary income can entitle you an additional income exemption of Rs 5,800 (max). Let’s understand this with an example ;
So, Rs 40000 standard deduction can lower your taxable salary income by a maximum of Rs 5,800. Then, what would be the impact on your tax liability? How much you can save in taxes?
The tax saved for each employee on this income would depend on the tax slab that income falls into.
- The saving in tax would be Rs 290 for those currently paying 5% tax on this income (Rs 5,800 * 5% = Rs 290)
- Rs 1,160 for those paying 20% as tax on this income (Rs 5,800 * 20% = Rs 1,160) and
- Rs 1,740 for those paying 30% tax on this income (Rs 5,800 * 30% = Rs 1,740).
However, these tax-savings would be nullified in most cases, except in the case of income up to Rs 5 lakh, due to increase in the cess payable from current 3% to 4% on the rest of the income tax payable by the individual. (Until FY 2017-18, there is 3% cess on personal income tax (2% for primary education and 1% for secondary and higher education). This will be replaced with 4% Health & Education Cess.)
In fact, individuals with income above Rs 5 lakh can end up paying more tax after taking into account the standard deduction, the removal of the allowances and the increase in cess rate. The ‘net benefit’ as shown in the above calculation turns negative and the individuals with higher salary income end up paying additional tax due to increase in CESS rate.
However, this move can benefit the pensioners substantially, as earlier they did not get any standard deduction or any of the other allowances given to salaried employees.
Though the impact of this amendment for the salaried may appear to be minimal, employers, however would stand to gain in terms of being spared of a whole lot of administrative efforts in processing medical bills of its employees.
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