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What is the meaning of standard deduction?

In July 2019, an announcement was made to increase the standard deduction available to salaried employees to ₹50,000 from ₹40,000, proposed in February 2019 by the then Finance Minister. This replaced a total of ₹34,200 annually available as medical reimbursement of ₹15,000 and a transport allowance of ₹19,200, to those drawing a fixed salary from a company.

What is standard deduction?
You are required to keep your investment proofs handy when claiming tax rebate for deductions under Section 80 of the Income Tax Act. Unlike this, the meaning of standard deduction is quite literal. It is a deduction that can be availed by all those who are salaried, as per Income Tax rules, whether or not they have made any actual expenses towards it.
The rate of deduction is the same for all. No bill or proof needs to be shown to claim it. So, when a person files his taxes for the financial year 2019-20, also referred to as Assessment year 2020-21, he or she can straightaway get a tax deduction of ₹50,000, without requiring to provide additional documentation. 

How does it help?Now that you have understood the meaning of standard deduction, you might have noticed that it is a useful tool to reduce net taxable income and total tax outgo going further. This would depend on the tax slab that you fall under. The higher the tax slab, the more would be the benefit. However, the increase in education cess from 3% to 4 % may cancel the benefit for those earning more than 5 lakhs. They may end up paying more. The table below illustrates the meaning of standard deduction over 3 consecutive years to better explain how net income is reduced with its implementation.

Particulars Until AY 2018-19 From AY 2019-20 From AY 2020-21
Gross Salary (in₹) 8,00,000 8,00,000 8,00,000
(-) Transport Allowance 19,200 Not Applicable Not Applicable
(-) Medical Allowance 15,000 Not Applicable Not Applicable
(-) Standard Deduction Not Applicable 40,000 50,000
Net Salary 7,65,800 7,60,000 7,50,000

Who benefits the most?
Pensioners have a reason to rejoice with the reintroduction of standard deduction. This is because the pension received from a previous employer is considered taxable, as it is counted as salary. A taxpayer receiving pension can claim either the amount of pension received or ₹50,000 standard deduction, whichever is less, at the time of filing tax.

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