Standard Deduction in Salary and Pension 2020 [AY 2020-21]

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Standard deduction refers to a straight reduction of salary income up to Rs.50,000/-. [Section 16(i)(ia)]

In budget 2018, India’s government had re-introduced the standard deduction for both salaried and pensioners at Rs. 40,000/-, which was increase to Rs. 50,000/- from assessment year 2020-21.

In this article, we will cover all the aspects of the standard deduction and its impact on both salary and pension income.

So, Let’s get busy!

Effective Date

This deduction is applicable from the financial year 2018-19 i.e the Assessment year 2019-20.

Condition for getting the deduction

To get the deduction, a taxpayer should be salaried or pensioner only.

Unlike other allowances, an employer is not required to submit any bill or expense vouchers for claiming the deduction.

Maximum Deduction Limit

The maximum deduction is Rs.50,000/- for AY 2020-21 and Rs. 40,000/- for AY 2019-20.

If a taxpayer’s income is less than above deduction under the head “Income From Salary” and his total income exceeds Rs.2,50,000/-. Than such taxpayer can claim his total salary income as standard deduction and file tax return.

Example:

During the financial year 2018-19, Mr.Tiwari took a job for 1 month only and received Rs.20,000/- as salary. He also earned interest incomes of Rs.3,00,000/-.

In this case, the total taxable income will be Rs.3,00,000/- only [20000+300000-20000]

Impact on the Income of a Pensioner

This deduction is most beneficial for senior citizen because they can get this standard deduction without any loss of previous years allowances.

Look at the example:

A senior citizen earning an equal amount of pension in both years but having different total income (taxable).

Particulars	FY 2017-18	FY 2018-19
Un-commuted pension	400000	400000
Less:
Standard deduction	0	40000
Total taxable income	400000	360000
Tax @ 5% on income above Rs.3 lakh up to Rs.5 lakh	5000	3000
Cess @ 3% / 4% (from FY 2018-19)	150	120
Total Tax	5150	3120
Net Benefit		2030
Maximum reduction in total taxable income can be Rs.40,000 for FY 2018-19. Assessee is a senior citizen i.e 60 yrs to 80 years. The net benefit is not fixed. It will change if we change the figures.

FAQ

Ques 1: Is standard deduction available on pension received from NPS scheme or LIC Jeevan Suraksha like insurance policies?

Answer: No, the standard deduction is not available in this case because it is taxable under the head Income from other Sources.

In the above case, employer-employee doesn’t exist therefore it will not be taxed under the head Income from salary and this deduction is only for salary or pension income.

Impact on the Income of an Employee

During FY 2017-18, employees were eligible for the deduction of transport allowance up to Rs.19,200 (1600 x 12) and medical expenditure reimbursement up to Rs.15,000/-.

For claiming the above allowances, employees were required to furnish proof of such expenses.

After the announcement of budget 2018, the standard deduction will replace both the above allowances.

However, transport allowance to the differently abled individual (Rs. 3,200/-) and reimbursement related to hospital expenses will continue. [under section 17(2)(viii)]

Look at the example:

An employee earning an equal amount of salary in both years but having different total income (taxable).


Particulars	FY 2017-18	FY 2018-19
1. Gross Salary
(a) Salary u/s 17(1)	400000	400000
(b) Perquisites	120000	120000
(c) Profit in lieu of salary	0	0
(d) Total	520000	520000
Less: Allowance
Transport allowance	19200	N/A
Medical Expense reimbursement (included in perquisites)	15000	N/A
Standard deduction	N/A	40000
Total Income	485800	480000

Tax on total income
Tax @ 5% on income above Rs.2.5 lakh up to Rs.5 lakh	11790	11500
Cess @ 3% / 4% (from FY 2018-19)	354	460
Total Tax	12144	11960
Net Benefit		184

1. The maximum reduction in total taxable income can be Rs.5,800 [40000-19200-15000] 2. The assessee is assumed to be a non-senior citizen 3. The net benefit is not fixed. It will change if we change figures.

Note:

Cess rate has been increased from 3% to 4%. This change will nullify the benefit of the standard deduction for employee and pensioner earning more than 5 lakh.
The benefit will depend on the tax bracket in which an assess falls. Assessee falling under 5% tax bracket can enjoy more benefit, however assessee under 30% bracket will have to pay more taxes due to 1% increase in cess rate.

Recommended To Read: How To Save Tax on Salary

Happy Reading!