Comprehensive Guide to Standard Deduction in the New Tax System

Standard Deduction Significance: A substantial number of employees and pensioners in India express the need for an increased “standard deduction” during income tax-related announcements in the budget. This concept, reintroduced in India approximately five years ago, holds significant sway over the taxable income of individuals and serves as a straightforward tool that streamlines tax calculations.

Understanding Standard Deduction The standard deduction simplifies the process of calculating taxable income for salaried individuals and pensioners. It entails a fixed amount subtracted from the gross salary, designed to cover expenses typically incurred in the course of employment. By reducing the taxable income, it effectively lowers the overall tax liability. This deduction eliminates the necessity for employees to submit various proofs for deductions related to transport allowance and medical expenses.

In India, the standard deduction was eradicated in 2005. Previously, salaried employees could claim a flat deduction from their salary income, either Rs 30,000 or 40% of their salary (if it didn’t exceed Rs 5 lakh), or a deduction of Rs 20,000 (if their salary exceeded Rs 5 lakh).

Initially, Indian salaried employees had to provide evidence for specific allowances to claim deductions. However, with the reintroduction of the standard deduction in the 2018-19 budget, this requirement was abolished, aiming to provide relief to employees and pensioners by replacing previous allowances with a more streamlined approach.

For the financial year 2023-24, the standard deduction is set at Rs 50,000 for salaried individuals and pensioners. For family pensioners, it stands at Rs 15,000 or 1/3rd of the family pension, whichever is lower. This amount is directly subtracted from the gross income, reducing the taxable income and alleviating the tax burden.

Benefits of Standard Deduction The primary advantage of the standard deduction lies in its simplicity and the elimination of the need for proof of expenditure. It is automatically applied to income, facilitating a smoother process for individuals filing their income tax returns. This not only saves time but also ensures a uniform deduction for all eligible taxpayers, thereby making the tax system more equitable.

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