Standard Deduction in New Tax Regime

Under union budget 2020, The Finance Minister introduced the “New Income Tax Slab” which is also called the “New Tax Regime”. As per the new tax regime, there is an option for individuals and HUF to pay tax at lower rates without claiming deductions under various sections.

On the other hand, the standard deduction is the portion of your income not subject to tax that can be used to reduce your tax bill. It is such a deduction offered to salaried individuals and pensioners. From AY 2021-22 (FY 2020-21), an individual can only claim the standard deduction if he opts for the old tax regime. So It is important to understand the concept of Standard Deduction in New Tax Regime.

What is Standard Deduction in India

If you are a business person, you can bring down your taxable income by deducting all the expenses that you can prove you made towards your business. However, a salaried person unlike a business person enjoys only a few tax-free allowances. While tax-free limits for allowances that can be availed of by salaried employees are fixed by the government and salaried persons face another hurdle when it comes to reimbursement of claims.

Standard Deduction Meaning- It means a flat deduction to individuals earning a salary or pension income. It was introduced back in Budget 2018 in lieu of transport allowance and reimbursement of miscellaneous medical expenses. It is allowable from the “Income taxable under the head salary” The tax benefits can be claimed irrespective of the actual amount spent on ‘transport allowance’ and ‘medical allowance’.

Also Read- What is the due date of the Income Tax Return Filing?

The provision of standard deduction was available earlier and it was abolished in the Finance Act 2005. However in budget 2018, our Finance Minister Sh. Arun Jaitley again introduced the same. These changes bring some joy to both employers and salaried employees. For the salaried employee, it would result in lower taxable salary income.

For claiming standard deduction, the taxpayers are not required to furnish any specific document.

The standard deduction replaced the transport allowance of Rs. 19,200 and medical reimbursement of Rs. 15,000. Let us understand the actual tax benefits given by standard deduction-

ParticularsFY 2018-19FY 2019-20 and FY 2020-21
Transport Allowance (A)19,20019,200
Medical Allowance (B)15,00015,000
Standard Deduction in place of A and B (C)40,00050,000
Net Tax Benefits (A+B-C)5,80015,800

Note- From AY 2021-22 (FY 2020-21), an individual can only claim the standard deduction if he opts for the old tax regime. It is advised to compare your tax liability under both tax regimes and then choose the one.

Must Read- TDS on Salary: Section 192 of the Income Tax Act, 1961

New Tax Regime of Income Tax

The New Tax Regime was introduced vide section 115BAC, which is applicable to individual and HUF assessee only and allows them to pay tax at lower rates. Under the New Tax Regime, the taxpayer has an option to choose either of the following:

1) To pay tax at lower rates as per the new tax regime on the condition that they forego certain permissible exemptions and deductions available under Income Tax.

2) To continue to pay taxes under the existing tax rates. The assessee can avail of rebates and exemption by staying in the Old regime and paying tax at the existing higher rate.

Standard Deduction in New Tax Regime

Individuals opting to pay tax under the new personal income tax regime will have to forgo almost all tax benefits that they have been claiming in the old tax structure.

Standard deduction of Rs. 50,000 for salaried and pensioners taxpayers including other deduction will not be available under the new tax regime and assessee have to pay tax at lower rates of income tax.

Standard Deduction in New Tax Regime- So, standard deduction defined under section 16(ia) of Rs. 50,000 for AY 2021-22 and AY 2022-23 is not available under the New Income Tax Regime. In case you wish to opt for the old tax regime of income tax then you can claim deduction and exemption including standard deduction.

Standard Deduction For Salaried Employees

The purpose of introducing standard deduction is to reduce paperwork and allow deduction irrespective of actual expenses, to provide tax relief to middle-class salaried employees, and to provide benefits to pensioners.

Limit of the standard deduction- The Finance Minister, Jaitley introduced a standard deduction of Rs. 40,000 in budget 2018 and the interim budget presented on 1st Feb 2019, include numerous tax benefits for the salaried and middle class. Among them, an additional amount of Rs.10,000 to the standard deduction is a noteworthy move. Accordingly, It can not exceed the salary amount. The maximum amount of standard deduction will be Rs. 50,000/- or salary amount whichever is lower.

Standard Deduction For Pensioners

A clarification was issued by the central board of direct tax (CBDT) clarifying the applicability of standard deduction on pensioners. In the clarification, CBDT mentioned that pension received by the taxpayers from an ex-employer is taxable under the head of salaries. Since the pension is taxable as a part of salary income the taxpayers will be entitled to standard deduction under form 16.

Standard Deduction For Senior Citizens

Individuals under the senior citizen’s categories are also eligible for a standard deduction of Rs. 50,000 (or amount of salary-pension whichever is lower) in a financial year. The standard deduction for senior citizens is also applicable for annuity payments which are taxable in the same way as income under the head salary. This is highly beneficial for retired persons who can look forward to significant savings.

Also Read- What is the Interest and Penalty for late filing of Income Tax Return

How to claim the standard deduction

A salaried or pensioner can claim a standard deduction while filing your income tax return. Usually, your employer will take your standard deduction into account while calculating your tax payable. A standard deduction can not exceed the salary amount. The maximum amount of standard deduction will be Rs. 50,000/- or salary amount whichever is lower.

It is to be noted that, the standard deduction is not available on the basis of no. of employers. The standard deduction is the overall limit for a whole year rather than on the basis of no. of employers.

Frequently Asked Questions- FAQs

  1. What is the standard deduction for AY 2020-21?

    Standard deduction means a flat deduction to individuals earning a salary or pension income. It was introduced back in Budget 2018 in lieu of transport allowance and reimbursement of miscellaneous medical expenses. It is allowable from the “Income taxable under the head salary” The tax benefits can be claimed irrespective of the actual amount spent on ‘transport allowance’ and ‘medical allowance’.
    For the assessment year 2020-21, the standard deduction applicable to salaries individual and pensioners is Rs. 50,000/-. But if you are choosing to pay tax under the new tax regime then you can not avail of the standard deduction

  2. Is standard deduction allowed in new tax regime?

    Individuals opting to pay tax under the new personal income tax regime will have to forgo almost all tax benefits that they have been claiming in the old tax structure.

    Standard deduction of Rs. 50,000 for salaried and pensioners taxpayers including other deduction will not be available under the new tax regime and assessee have to pay tax at lower rates of income tax.

    Standard Deduction in New Tax Regime- So, standard deduction defined under section 16(ia) of Rs. 50,000 for AY 2021-22 and AY 2022-23 is not available under the New Income Tax Regime. In case you wish to opt for the old tax regime of income tax then you can claim deduction and exemption including standard deduction.

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Disclaimer: The information contained in the above article are solely for informational purpose after exercising due care. However, it does not constitute professional advice or a formal recommendation. The author does not own any responsibility for any loss or damage caused to any person, directly or indirectly, for any action taken on the basis of the above article.

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Compiled by- CA Chirag Agarwal (Practicing Chartered Accountants)

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