Standard deduction was first introduced in the year 1974 under Section 16 of the Income Tax Act, 1961. However, it was later abolished with effect from Assessment Year 2006-07. More recently, in 2018, the Government of India proposed to re-introduce standard deduction for a select group of individuals.
The Indian Taxation System allows a flat deduction to salaried employees and taxpayers receiving a pension. This deduction amount stood at Rs. 40,000 in the financial year 2018-19, which was then increased to Rs. 50,000 in 2019. Additionally, taxpayers need not submit any disclosures or investment proofs to avail this deduction. As a result, taxpayers in India may choose either the pre-existing itemised deductions or a standard deduction of Rs. 50,000 as of 2022.
The implementation of a standard deduction means that salaried employees can claim an exemption of Rs. 50,000 out of their income. Employees can avail the deduction of this amount from their gross salary.
This system essentially replaces the earlier allowances in place, namely the transport allowance of Rs. 19,200 and medical reimbursement of Rs. 15,000, per annum. So, the effective added benefit of the standard deduction to salaried employees stands at Rs. 15,800 [Rs. 50,000 – (Rs. 19,200 + Rs. 15,000)].
The table below further illustrates this point through a comparison of the effect of standard deduction on salary on net taxable income for various financial years:
| Particulars | FY 2017-18 | FY 2018-19 | FY 2019-20 | FY 2020-21 |
| Gross Salary | Rs. 5,00,000 | Rs. 5,00,000 | Rs. 5,00,000 | Rs. 5,00,000 |
| Medical Allowance | Rs. 15,000 | Not Applicable | Not Applicable | Not Applicable |
| Transport Allowance | Rs. 19,200 | Not Applicable | Not Applicable | Not Applicable |
| Standard Deduction | Not Applicable | Rs. 40,000 | Rs. 50,000 | Rs. 50,000 |
| Net Taxable Income | Rs. 4,65,800 | Rs. 4,60,000 | Rs. 4,50,000 | Rs. 4,50,000 |
Therefore, it is evident that the taxable income of salaried employees has been reduced since the implementation of the standard deduction.
Moreover, the standard deduction is applied to an employee’s annual gross salary, thereby lowering his/her taxable income. Resultantly, it facilitates taxpayers to reduce their tax outgo.
The law in India recognises any individual resident between the age group of 60-80 years as a senior citizen. A pension is a stipend or periodical allowance granted on account of the past service of an individual, particularly a senior citizen.
According to the Indian Taxation System, the pension received by senior citizens from their previous employers is taxable under the head ‘salaries’.
Under Section 16 of the IT Act, pensioners are entitled to claim a deduction of Rs. 50,000 per annum or the amount of pension, whichever is less. Therefore, the reintroduction of standard deduction has eased the financial burden on senior citizens.
Given below are the salary breakup and tax outgo of an individual prior to standard deduction:
| Particulars | Amount (Before Standard Deduction) |
| Basic salary + Dearness Allowance | Rs. 3,90,000 |
| Medical Reimbursement (non-taxable) | Rs. 15,000 |
| Conveyance Allowance (non-taxable) | Rs. 19,200 |
| Other Taxable Allowance | Rs. 1,10,000 |
| Gross Salary | Rs. 5,00,000 |
| Standard Deduction | Nil |
| Income under the head Salary | Rs. 5,00,000 |
| Income Tax (5%) | Rs. 25,000 |
| (-) Rebate under Section 87A | Nil |
| Total tax payable after rebate | Rs. 25,000 |
| Surcharge @ 10%/15% | Nil |
| Total tax payable after surcharge | Rs. 25,000 |
| Health and Education cess @ 4% | Rs. 1,000 |
| Total tax, surcharge and cess | Rs. 26,000 |
The table below elaborates the effect of standard deduction 2022 on tax calculation:
| Particulars | Amount
(After Standard Deduction) |
| Basic salary + Dearness Allowance | Rs. 3,90,000 |
| Medical Reimbursement | Nil |
| Conveyance Allowance | Nil |
| Other Taxable Allowance | Rs. 1,10,000 |
| Gross Salary | Rs. 5,00,000 |
| Standard Deduction | Rs. 50,000 |
| Income under the head Salary | Rs. 4,50,000 |
| Income Tax (5%) | Rs. 22,500 |
| (-) Rebate under Section 87A | Nil |
| Total tax payable after rebate | Rs. 22,500 |
| Surcharge @ 10%/15% | Nil |
| Total tax payable after surcharge | Rs. 22,500 |
| Health and Education cess @ 4% | Rs. 900 |
| Total tax, surcharge and cess | Rs. 23,400 |
Therefore, a standard deduction enables an individual can save a significant amount on the total tax payable. The tax saving amount, in the above case, stands at Rs. 2,600 (Rs. 26,000-Rs. 23,400).
Income tax standard deduction extends certain deductions and allowances to salaried income. Deductions under Section 80C, 80D, and 80E help reduce the taxable income of an employed taxpayer.
An overview of these Sections is given as below:
This Section offers taxpayers a deduction of up to Rs. 1,50,000 on investments. Section 80CCC allows a deduction to an individual for any amount paid towards an annuity plan of LIC or any other insurer. Subsequently, taxpayers can claim deductions on their contribution to the pension account under Section 80CCD (1). The total deduction available is 10% of salary if a taxpayer is an employee, 20% of total gross income if a taxpayer is self-employed or Rs. 1,50,000, whichever is less.
An individual can claim a deduction of Rs. 25,000 on insurance for self, spouse or dependent children under Section 80D. An additional deduction of Rs. 25,000 is available for the insurance of parents if they are less than 60 years of age and Rs. 50,000 if they are over the age of 60 years.
Section 80E allows deductions on interest paid on education loan for higher studies. Here, this loan may have been availed by the taxpayer, spouse, children or a student for whom this taxpayer is a legal guardian. Furthermore, Section 80EE offers deductions on home loan interest for first-time homeowners. The value of the home loan availed must be less than Rs. 35,00,000 and that of the property must be less than Rs. 50,00,000.
Also, read – Deductions Under Section 80C, 80CCC, 80CCD and 80D
The Income Tax Act, 1961, offers a number of deductions to pensioners, such as:
Section 80TTB allows senior citizens to claim a deduction up to Rs. 50,000 on bank or post office accounts as well as savings bank account(s).
A senior citizen can avail of deductions on the payment of health insurance premium under Section 80D. The deduction limit on this payment is Rs. 50,000.
This section allows senior citizens to claim a deduction up to Rs. 1,00,000 in case of medical treatment of some specific diseases or ailments.