Budget 2018 standard deduction: Now taxpayers, pensioners need no bills, but how big is the benefit?

By: | Updated: February 1, 2018 10:10 PM

Budget 2018: Although the Budget proposals made by Finance Minister Arun Jaitley today left the common man and taxpayers high and dry, the salaried people got a bit excited after hearing the news that the erstwhile standard deduction – which was done away with from Financial Year 2005-06 – has been reintroduced by the government.

FM Arun Jaitley presents Union Budget 2018 today.Union Budget 2018: Standard deduction means a fixed amount that a tax payer is allowed to deduct from the gross income, in lieu of various other deductible expenses or in addition to other deductible expenses.

Budget 2018: Although the Budget proposals made by Finance Minister Arun Jaitley today left the common man and taxpayers high and dry, the salaried people got a bit excited after hearing the news that the erstwhile standard deduction – which was done away with from Financial Year 2005-06 – has been reintroduced by the government. However, soon they realised that the actual benefit from this deduction isn’t going to be substantial, except for some people. The only benefit is that “salaried taxpayers and pensioners need no documents, bills to claim Rs 40,000 standard I-T deduction on travel, medical expenses,” as informed by CBDT chief Sushil Chandra today.

Talking about the standard deduction in Budget 2018, Aditya Modani, Tax Director, EY India, said, “Re-introduction of standard deduction meets the long-time wish of salaried class taxpayer. Standard deduction will be provided without any requirement to furnish any evidence for claiming such a deduction.”

According to tax experts, the Union Budget 2018 seems to be very welcoming for the salaried class people with the re-introduction of Standard Deduction of Rs 40,000. However, “taking a closer look at it, we notice that the net benefit from this deduction may not prove to be very beneficial. This deduction is given in lieu of transport allowance and medical expenses reimbursement, which earlier was Rs 19,200 and Rs 15,000, respectively. So in actual the net benefit comes out to be Rs 5800 p.a. only,” says Karan Batra, Founder & CEO of CharteredClub.com.

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Over that, there’s also an increase in the overall cess by 1%, which further increases the tax liability. Hence, a person under the 30% tax bracket had to pay 3% cess earlier, but now he will have to pay 4% cess, as a result of which his overall tax liability will increase.

The real benefit of re-introduction of Standard Deduction, therefore, is only to 2 classes of salaried individuals:

1. Pensioners (as they were not getting Transport Allowance and Medical Reimbursement)

2. Salaried Individuals whose employers were not giving them Transport Allowance and Medical Reimbursement, and were only giving a lumpsum amount as Salary + DA.

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So, “overall if we see, the re-introduction of standard deduction is a good amendment for people in the small salary bracket, but for the ones on the higher side, the net benefit is not very impressive,” says Batra.

Impact of introduction of standard deduction in lieu of transport allowance and medical reimbursement

    (all figures in INR)
Pre Budget Existing exemption limitPost BudgetEligible LimitChange
Transport Allowance 19,200 Standard Deduction 40,000 5,800
Medical Reimbursement 15,000
     
Applicable net income slabPotential Tax Savings*   
     
2,50,001 to 5,00,000 290    
5,00,001 to 10,00,000 1,160    
10,00,001 and above 1,740   

* These tax savings do not consider the impact of Health and Education Cess and applicable surcharge. (Source: EY)

The salaried class taxpayer has for many years expected the re-introduction of Standard Deduction. The Finance Minster today has delivered on this front however this has been reintroduced in lieu of tax free transport allowance and medical reimbursement. Therefore the net income on which benefit would be available is INR 5,800 and consequential income-tax saving will depend on the income-tax bracket an individual falls in.  In case of taxpayer who are differently abled persons, the transport allowance exemption would continue. 

Earlier, tax experts were expecting that standard deduction for salaried employees may be re-introduced by Finance Minister Arun Jaitley in this year’s Union Budget 2018. However, before taking a look at what they said, let’s first see what is standard deduction.

Also read: Budget 2018 key takeaways: India on tenterhooks, did Arun Jaitley give income tax returns, other reliefs? Truth on tough love here 

What is Standard Deduction

Standard deduction means a fixed amount that a tax payer is allowed to deduct from the gross income, in lieu of various other deductible expenses or in addition to other deductible expenses.

From financial year 2005-06, this deduction was removed. In India, it last existed during the financial year 2004-05 wherein a salaried employee could claim a fixed deduction from the salary income of Rs 30,000 or 40% of salary (if the salary did not exceed 5 lakh); or a deduction of Rs 20,000 (if the salary exceeded Rs 5 lakh).

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Earlier Expectations of Experts

Tax experts earlier said that standard deduction was needed because there are many expenses that an employee incurs during the course of his employment for which no deduction is available to him. So, there must be some supplementary deduction available specifically against salary income like the standard deduction.

“Unlike self-employed individuals (be it business persons or professionals), salaried employees only enjoy a few tax free allowances, the quantum of which has not kept in line with inflation. For instance, a very small amount of tax exemption of Rs 1,600 per month is available for transport allowance paid for commuting between home and office, which is not at all genuine considering today’s expenses. The salaried individuals have always been loyal in contributing to the direct tax collection. As per the data, it has been observed that the maximum number of returns filed is in the Form ITR 1, which is mostly used by salaried and pensioners. Thus, the Modi government may allow some genuine benefit to the salaried class by providing the standard deductions again or make similar provisions in the Union Budget 2018,” said CA Abhishek Soni, Founder tax2win.in.

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