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Giving in to the popular demand, Finance minister Arun Jaitley reintroduced standard deduction for salaried individuals after a gap of 13 years in the budget for 2018-19. In his speech, Jaitley proposed to offer a standard deduction of Rs 40,000 to salaried individuals.
In simple terms, it refers to a deduction allowed in income tax, irrespective of expenses incurred or investment made by assesses on transport and medical. There is no need for a taxpayer to keep proof of expenses such as bills for medical.
The move will reduce the income tax liability of salaried class besides reducing paperwork.
But the actual benefit will only be to the tune of Rs 5,800 per person per annum as the current level of benefits for medical and conveyance stands at Rs 34200. Currently, the transport allowance offered is Rs 1,600 a month or Rs 19,200 per annum. The medical allowance is Rs 15,000 on furnishing of bills.
Standard deduction for personal income tax was recommended by the tax simplification committee chaired by former judge R V Easwar.
Standard deduction was earlier given as a lump sum benefit towards the cost to income till 2003-2004. Then, finance minister P Chidambaram did away with standard deduction for salaried personnel in 2004-2005, on the reasoning that there was an equivalent increase in the basic exemption limit and other deductions. It was then abolished after the tax exemption ceiling on investment was raised to Rs 100,000. The standard deduction was capped at Rs 30,000 for total income under Rs 500,000 a year and Rs 20,000 for income over Rs 500,000.
Restoration of standard deduction will not affect the threshold for income tax exemption, currently Rs 250,000.
Easwar panel had recommended doing away with smaller deductions given in income tax for the standard deduction. It had called for reviewing medical reimbursements.
The salaried class has been demanding a reintroduction on standard deduction on the back of administrative hurdles of furnishing proof for medical expenses to claim the deduction.
Standard deduction will allow for a flat deduction from salary income, to make up for some of the expenses that an employee would incur. Withdrawal of standard deduction allowance was in contrast with benefit to businesses, who can bring down your taxable income by deducting all the expenses made towards carrying out the business.