What is the meaning of standard deduction?

What is a standard deduction?

You are required to keep your investment proofs handy when claiming tax rebates for deductions under Section 80 of the Income Tax Act. Unlike this, the meaning of standard deduction is quite literal. As per Income Tax rules, the deduction can be availed by all the salaried individual taxpayers, 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.

But now if assessee opts for new regime for ITR filing then assessee can not avail benefits of standard deduction. In the new tax regime, standard deduction of Rs 50,000 cannot be claimed.

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. The table below illustrates the meaning of standard deduction over 3 consecutive years to better explain how net income is reduced with its implementation.

Who benefits the most?

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