What is standard deduction in income tax?

By | October 31, 2021

The standard deduction is the amount of untaxed income that can be utilised to lower your tax burden. If you do not itemise your deductions and use Schedule A of Form 1040 to determine taxable income, the Internal Revenue Service (IRS) permits you to take the standard deduction. Your standard deduction is determined by your filing status, age, and whether you are disabled or claimed as a dependent on another person’s tax return. 

A standard deduction of Rs. 50,000/- is taken from your “Income taxable under the head wages.” This tax credit can be claimed regardless of the amount spent on Medical Allowance and Transportation Allowance.

NOTE: Individuals can only claim the deduction if they choose the old tax regime starting in FY 2020-21 (AY 2021-22). Compare and contrast your tax obligations under the old and new tax regimes. 

Getting in depth about the standard deduction

The amount of money that the federal or state government deducts from your taxable income is known as the income tax. It’s vital to keep in mind that taxable income and total income for the year are not the same thing. This is because the government enables a portion of total income to be reduced or deducted in order to lower the amount of income that will be taxed. 

Due to deductions, taxable income is frequently less than total income, lowering your tax payment. Itemized deductions or the standard deduction are the two types of deductions available. It’s up to you which one you use, but you can’t use both. 

The itemised deduction option allows you to specify all of your tax-deductible expenses for the year, including property taxes, medical bills, qualifying charity gifts, gaming losses, and other items that affect your tax bill. 

Normally, you would itemise if the total amount of your itemised deductions exceeds the standard deduction. If you don’t have any other options, you should take the standard deduction. 

Itemized Deductions vs. Standard Deductions

The main advantage of the standard deduction over itemised deductions is that taxpayers do not have to keep track of every possible qualifying expense throughout the year. Furthermore, many people may find that the standard deduction amount is higher than the total they could obtain if they tallied up all of their tax-deductible expenses separately.

Eligibility to Take Advantage of the Standard Deduction

This deduction is available to all salaried individuals, even pensioners, because a pension received from a previous employment is deemed income under the Income Tax Act’s “Salary” heading. Self-employed people, especially self-employed professionals, are unable to work.

What is the procedure for claiming the standard deduction?

When submitting your tax return, you can claim the standard deduction. Please keep in mind that the deadline for filing IT returns is usually the 31st of July of the assessment year in question. This deduction is usually applied automatically by your employer when calculating your tax for TDS reasons (tax deducted from source).

Is it necessary to claim the standard deduction on bills?

To claim the standard deduction, you do not need to submit any medical or travel bills. This differs from the method for claiming previously approved medical and travel reimbursements, which needed all relevant bills.

What is the main objective of standard deduction?

The five main goals of introducing standard deduction is:

  1. to make things easier for people, 
  2. to cut down on paperwork 
  3. to allow for deductions regardless of actual expenses,
  4. to provide tax relief to people in the middle class who earn a living wage,
  5. to provide assistance to retirees

What is the standard deduction’s upper limit?

The amount of the standard deduction cannot exceed the amount of the pay. The maximum deduction is Rs. 50,000/- or 25% of your salary, whichever is lower. When there are many employers, how is the standard deduction calculated?

Standard deductions are not available based on the number of employers. Instead of being based on the number of employers, the standard deduction is based on the aggregate limit for the entire year. 

Let’s pretend Mr. Avasthi worked for two companies in fiscal year 2019-20. In such instance, you might be wondering how much standard deduction Mr. Avasthi is allowed to claim:

Option 1: 50,000 rupees

Option 2: 1,00,000 rupees (Rs. 50,000 for each employer)

Mr. Avasthi is eligible for a standard deduction of up to Rs. 50,000/-.

What effect does the standard deduction have on taxation for salaried workers?

The introduction of the standard deduction benefited middle-class workers the most in terms of lowering their tax liability. The total benefit of the increased deduction was Rs. 5,800 (Rs. 15,800 for FY 2019-20). 

What Impact Does the Standard Deduction Have on Pensioners? 

This decision to enable standard deduction gives major benefits to retirees, who do not ordinarily receive any allowance for transportation or medical expenses. 

Furthermore, pensioners will only be eligible for the standard deduction if their income is taxable as pay. If it is taxed as other source income, the standard deduction will be unavailable.

What changes were made in the Budget 2018 regarding the standard deductions?

Standard deductions were implemented in Budget 2018 for both paid employees and retirees. It refers to a taxable income deduction of Rs. 50,000 (formerly Rs. 40,000 for FY 2018-19), which provides tax relief to a specific group of people. 

Prior to Budget 2018, salaried individuals may claim reimbursement for travel and medical expenditures up to Rs 19,200 and Rs 15,000, respectively. Budget 2018 replaced these Rs 34,200 claims with a basic deduction of Rs 40,000 per year, which was later enhanced to Rs 50,000 in the Interim Budget 2019.

Is it possible to combine it with other deductions?

Yes, in addition to the standard deduction, you can claim numerous other deductions, such as those provided under Section 80C (PPF, ELSS Funds, etc.) to Section 80U and their sub-sections.