Standard Deduction for Salaried Individuals

You must have wished you could lower the amount of taxes you pay without needing to remember dozens of receipts and expenses at some point. Well, what if we tell you that you can? To save you the trouble of wondering “how,” the answer is standard deduction!

Whether you are new to taxes or have been filing it for years, understanding how this deduction works can be a game-changer. It is simple, easy, and designed to make your life a little less stressful when tax time comes around. So, let us break it down and see how it can help you save money on your tax bill!

What is the Standard Deduction in Income Tax?

The standard deduction on salary is a fixed amount that salaried employees can subtract from their total income. This helps reduce the amount on which you have to pay taxes. As per Budget 2024, Finance Minister Nirmala Sitharaman increased this deduction from ₹50,000 to ₹75,000 for salaried individuals. It is a helpful measure from the government that helps you reduce your tax burden without providing any receipts or documents to prove your expenses.

In 2018, the Indian government introduced the standard deduction to replace certain allowances like transport and medical reimbursements. Moreover, under the old tax regime, you can claim this deduction and other common tax deductions like Section 80C, House Rent Allowance (HRA), etc. Since then, salaried people have been able to enjoy a flat deduction from their taxable income.

How Does Standard Deduction Work?

To know exactly how such a deduction works, let us understand it with a simple example. Imagine your total salary for the year is ₹12,00,000. Now, instead of paying tax on the entire ₹12,00,000, you can deduct the applicable amount from it.

In the current regime (FY 2024-25), the standard deduction for salaried employees has been increased to ₹75,000. This means you will only need to pay taxes on ₹11,25,000 after subtracting the deduction. Easy, right?

This deduction is available regardless of the actual expenses you have had during the year. The good part is you do not need to keep track of bills or receipts for specific expenses like transportation or medical costs. This is a straightforward way to lower your taxable income and save money on taxes.

Eligibility Criteria for Income Tax Standard Deduction?

Now, who can claim this deduction? Before you move any further, you need to know whether you can claim this deduction.

Salaried Employees

The standard deduction is mainly for individuals receiving a salary. It applies to anyone who is employed and receiving a regular paycheck.

Pensioners

Even though pensioners are technically no longer “salaried,” they are eligible for the standard deduction on their pension income. This was a noteworthy move by the government to help older citizens reduce their tax burden.

One thing to remember is that this deduction applies automatically. As long as you are receiving a salary or pension, you will get the benefit when filing your taxes.

Purpose of Standard Deduction

You might be wondering, “Why does the government offer this deduction in the first place?” The purpose is simple. It is to provide relief for everyday expenses. While earlier you had to claim separate allowances like medical reimbursement or travel expenses, the standard deduction makes things easier.

By offering this flat deduction, the government simplifies the tax filing process and helps salaried people deal with common, unavoidable expenses like commuting and healthcare costs. Think of it as a one-size-fits-all solution that saves you from unnecessary paperwork while still offering tax relief.

Impact of Standard Deduction on Individuals

The introduction of the standard deduction has positively impacted many taxpayers. Here’s how it benefits individuals:

Lower Taxable Income

The obvious benefit is that it reduces your taxable income. This, in turn, lowers your tax liability. By automatically reducing your income by ₹75,000, you pay less tax at the end of the year.

Simplified Filing

You no longer need to collect and submit receipts for various small expenses. Instead, you can claim this deduction automatically, simplifying the entire tax process.

Universal Benefit

Since it is available to all salaried employees and pensioners, it is a deduction that everyone can take advantage of, no matter their salary level. You do not need to meet specific conditions other than being salaried or receiving a pension.

Increased Savings

For most people, the standard deduction means more savings since it reduces the amount of income that is taxed. Over time, this can lead to significant savings.

By lowering your taxable income, the standard deduction can also help reduce the tax deducted at source (TDS) from your salary, resulting in more take-home pay each month.

Standard Deduction in New Tax Regime

Many people wonder what is standard deduction in new tax regime and whether it still applies. When the new tax regime was introduced in Budget 2020, this deduction was not available at first. However, from FY 2023-24 onwards, the government has reintroduced this benefit.

In Budget 2023-24, you could claim a standard deduction of ₹50,000 under the new tax regime. But, starting from FY 2024-25, this amount has increased to ₹75,000. Note that under the old tax regime, the deduction is the same at ₹50,000. So basically, if you are a salaried person or pensioner, you can enjoy the lower tax rates of the new regime while still benefiting from the ₹75,000 reduction in your taxable income.

However, under the new tax regime, while you can enjoy the lower tax rates along with the standard deduction, it is important to note that you cannot claim certain exemptions like the HRA exemption. If you live in a rented house and rely on this exemption, it may be worth calculating whether to opt for the new regime or continue with the old one to maximize your tax savings.

Conclusion

Now that you know how the standard deduction works, do you feel more confident about filing your taxes? Remember, understanding the ins and outs of deductions can truly make a difference. By using the valuable tool of standard deduction, you can lower your tax burden in a simple and straightforward way. It requires no additional paperwork, helps reduce your taxable income, and makes tax filing much easier.

So, while planning your finances and preparing for tax season, remember this deduction tool and other income tax saving schemes in mind. This is one of the simplest ways to ensure you pay less tax and keep more of your hard-earned money!

FAQs on Standard Deduction