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  • Budget 2018 reinstating standard deduction? Here's how it could help you save tax

    There is a buzz in the air that Arun Jaitley and his team of ministers could be working on a possible tweak in salary structure which could see standard deduction coming back. 

    According to ET Now sources officials at the finance ministry are working on reintroducing standard deduction for salaried employees. If the standard deduction does make a comeback, it will lead to more money in the hands of the salaried class and even bring in parity with the non-salaried individuals, i.e. self -employed, who pay taxes after taking deductions on the expenses incurred for earning that income. 

    What is Standard deduction? 
    Standard deduction was a part of the Income-tax Act, 1961 until it was withdrawn in the Union budget of 2005-06. It allowed the salaried class to take care of expenses that didn't come under the purview of the income tax rules. 

    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'. 

    The simplicity of calculation of standard deduction was its main advantage. It was given as a straight deduction from the salary before arriving at the taxable salary. It did not require any disclosures, investment proofs or even bills. 

    Deduction allowed was equivalent to Rs 30,000 or 40 percent of 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. 

    What could be proposed in the budget 
    If the governemnt allows a flat deduction of Rs 50,000 to the salaried class, those in the highest bracket of 30 per cent will end up saving Rs 15,300 a year in taxes. Similarly, those in the middle income tax bracket of 20 per cent can save Rs 10,150 annually, and those in the lowest tax bracket will save Rs 2,575 in taxes. 

    At present, apart from self-employed individuals, family pensioners are also allowed standard deduction from their income. Deduction under section 57(iia) is allowed on one-third of such pension or Rs 15,000, whichever is lower.