A limit for standard deduction was
set at Rs 20,000 for those earning above Rs 5 lakh.
Budget
2018 proposes to provide standard deduction of Rs 40,000 from salary income to
employees but also proposes to take away existing annual transport allowance of
Rs 19,200 and Rs 15,000 medical reimbursement. Prima facie income exempted from
tax after setting off the gain and loss is Rs 5800 only. The tax saved for each
employee on this income would depend on the tax slab that income falls into.
The saving in tax would be Rs 290 for those currently paying 5% tax on this income;
Rs 1160 for those paying 20% tax on this income; and Rs 1740 for those paying
30% tax on this income. However, these savings would be nullified in most
cases, except in the case of income up to Rs 5 lakh, due to increase in the
cess payable from current 3% to 4% on the rest of the income tax payable by the
individual. As a consequence, individuals with income above Rs 5 lakh would end
up shelling out more tax after taking into account the standard deduction, the
removal of the allowances and the increase in cess. (Refer tables below
for calculations)
However,
pensioners will benefit substantially as earlier they did not get any standard
deduction or any of the other allowances given to salaried employees. They
would save tax payable on this entire amount of deduction but of course have to
pay the increased cess on the balance income.
Currently,
medical bills of up to Rs 15000 were reimbursable to employees tax free per
financial year by employers. A tax-exempt transport allowance of Rs 19200 per
financial year was also allowed to be paid to employees.
Standard
deduction is essentially a flat amount subtracted from the salary income before
calculation of taxable income. The standard deduction was a part of the
Income-tax Act until former finance minister, P. Chidambaram, withdrew it in
the Union budget of 2005-06. Standard deduction allowed
the salaried class to take care of expenses that didn't
come under the purview of the income tax rules.
The
standard deduction that was allowed was equivalent to Rs 30,000 or 40% of the
income, whichever was lower, for salaried employees earning an annual income
between Rs 75,000 and Rs 5 lakh. There was also a limit set for standard
deduction at Rs 20,000 for those earning more than Rs 5 lakh.
The
simplicity of calculation of standard deduction was its main advantage. It was
given as a straight deduction from the income chargeable under the head salary.
It did not require any disclosures, investment proofs or bills.
It
had put the salaried tax payers at par with the consultants, self-employed and
freelancers who are allowed to take deductions on expenses incurred for earning
that income.
The
removal of standard deduction from the tax structure basically meant that the
salaried class paid the tax on 'Gross Income', while consultants, self-employed
and freelancers paid income tax on their 'Net Income'.
For
taxable salary income of Rs 5 lakh
Taxable salary income of Rs 25 lakh
For
taxable salary income of Rs 65 lakh
For
taxable salary income of Rs 1.2 crore
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