What is Standard Deduction for Salaried Individuals & Pensioners

In its current form, standard deduction on income tax was introduced in Interim Budget 2019 and replaced two deductions that were offered earlier – travel allowance and medical deduction. Currently, the standard deduction offered under Section 16 of the Income Tax Act is a flat deduction of Rs. 50,000 on the taxable income of salaried employees and pensioners irrespective of their earnings.

There are two key points that you should keep in mind about standard deduction in income tax under Section 16 of the Income Tax Act, 1961:

• The standard deduction of Rs. 50,000 is fixed irrespective of the annual income.
• This deduction cannot be availed by taxpayers opting for the New Tax Regime u/s 115 BAC introduced in Budget 2020.

What’s more, under the old tax regime, this deduction in income tax can be availed in addition to other common tax deductions like house rent allowance (HRA), Section 80C, Section 80D,Rebate under Section 87A and others. This can allow you to save a significant amount in taxes.

To get better understanding how salaried tax payers and pensioners can benefit from standard deduction on salary, let’s consider an example:

Sumit's gross salary is ₹12 lakh. He has decided to stick to the old tax regime. In this case, his net taxable income before Section 80C deduction will look like this:

Under current rules provided in Section 16 of the Income Tax Act, 1961, standard deduction only applies to salaried individuals including salaried professionals and retired individuals . These individual tax payers are eligible to avail the benefit of this deduction irrespective of their annual income as long as they have opted for the old tax regime.

The below list are the types of tax payers who are not eligible to avail standard deduction benefit in 2023 under Section 16:

• Self-employed individual tax payers
• Any individual tax payer who has opted for the new tax regime
• HUF or any other non-individual i.e. institutional tax payer irrespective of tax regime

The purpose is to reduce the tax liability on tax payers like salaried individuals and pensioners who are already subject to tax deducted at source (TDS).

Another key benefit of this income tax deduction is that no paperwork is required to claim this kind of deduction on income. This is a stark contrast to earlier deductions like travel allowance and medical allowance could only be claimed at actuals by submission of bills, which often involved significant amount of paperwork.

Standard deduction is also easy to apply. Instead of itemized deductions, there is a flat reduction in the taxable income. It simplifies the computation of tax immensely for the tax payer.

The standard deduction has benefited salaried employees and pensioners by reducing their taxable income through a simple to understand and implement calculation. It has also helped reduce the paperwork required to claim the benefit as no proof needs to be shown when claiming tax benefits under it.

Even better, taking the benefit of standard deduction does not impact your ability to save taxes under popular Sections like 80C, 80D, 80TTA, 80TTB, Section 24, and more. The only caveat being that the tax payer needs to opt for the old tax regime in order to avail all of these tax saving options.

The Union Budget 2020 introduced the new tax regime through the insertion of a new Section 115 BAC in the Income Tax Act, 1961. The new tax regime offers lower slab rates as compared to the old tax regime, however, tax saving options under new tax regime are relatively few as compared to the old tax regime. Moreover, standard deduction was also not available under the new regime till FY 2022-23.

However as of FY 2023-24, standard deduction of 50,000 for salaried and pensioners is available under the new tax regime too. This has been done to bring parity of taxation in the new tax regime vs. old tax regime.

income tax calculator or take the help of a tax consultant to confirm which option is more beneficial for you.