Budget 2018 though did not change the broad tax slabs but made some changes in the tax exemptions. One of them was the reintroduction of Standard Deduction for salaried and pensioners. From FY 2018-19 (AY 2019-20) all salaried and pensioners would be eligible for the standard deduction of Rs 40,000. However, as they say, the devil lies in details. With the introduction of the standard deduction, the finance minister has removed two popular tax deductions which were available for salaried: Transport Allowance of Rs 19,200 and Medical Reimbursement of Rs 15,000. So, the net impact of the standard deduction for salaried would only be Rs 5,800 (40,000 – 19,200 – 15,000). However, as pensioners did not have these allowances standard deduction for them is really good news.
Standard Deduction Impact:
The table below shows the impact of standard deduction on salaried who used to receive tax-free transport allowance and medical reimbursement till this year.
|Particulars||Until AY 2018-19||From AY 2019-20|
|Gross Salary (in Rs.)||10,00,000||10,00,000|
|(-) Transport Allowance||19,200||Not Applicable|
|(-) Medical Allowance||15,000||Not Applicable|
|(-) Standard Deduction||Not Applicable||40,000|
|Net Taxable Salary||9,65,800||9,60,000|
As you can see in the above example the NET impact would be only Rs 5,800 extra tax exemption over the last year.
CBDT issues clarification regarding the applicability of standard deduction to pension received from a former employer.
As per the amended Section 16 of the Income-tax Act, 1961, a taxpayer having income chargeable under the head “Salaries” shall be allowed a deduction of Rs 40,000/- or the amount of salary, whichever is less, for computing his taxable income.
It is clarified that a taxpayer who is in receipt of a pension from his former employer shall be entitled to claim a deduction of Rs 40,000/- or the amount of pension, whichever is less, under Section 16 of the Act.
Standard Deduction for salaried was abolished in Budget 2005. Until then salaried individuals could claim Rs 30,000 or 40% of salary whichever is less for gross salary up to Rs 5 lakh. For salary of more than Rs 5 Lakh, the standard deduction was fixed at Rs 20,000.
Many salaried had this question what proof would be required to claim standard deduction? The answer is there is NO proof or declaration is required for the standard deduction. It’s more in the lines of transport allowance where no proof was required. An added advantage with the abolition of medical reimbursement there would be one lesser proof to submit to an employer!
Standard Deduction for Family Pension?
The rules for standard deduction is clear for Pensioners but what happens after the death of pensioner? After the death of the pensioner, the legal heir (Spouse, children below the age of 25 years, unmarried daughter and dependent parents in certain cases) continue to receive a pension. This is referred to as “Family Pension”. Also in case of a normal pension, the income is part of salary in ITR, however in the case of a family pension, the income is considered from other sources. So the above standard deduction of Rs 40,000 proposed in Budget 2018 would not be applicable to family pension.
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However, for family pension, a standard deduction u/s 57(iia) is available under which an amount of Rs 15,000 or 1/3rd of the uncommitted pension received, whichever is less, shall be exempt. For Example, if a family member receives a pension of Rs 50,000, the exemption available is least of Rs 15,000 or Rs 16,667 (1/3rd of Rs 50,000). Thus, the taxable family pension will be Rs 50,000 – Rs 15,000 = Rs 35,000.
Do-EPF/Insurance Pension get Standard Deduction?
The standard deduction provision is clear for salaried and for people receiving the pension from their ex-employers. But what about investors receiving the pension from pension plans they invested? Well, they would not be eligible for standard deduction.