- Standard deduction of Rs 40,000 would be allowed for salaried individuals
- Transport allowance, medical expenses exemption will be withdrawn
- Standard deduction has been re-introduced after a gap of 13 years
As Standard Deduction has been reintroduced, now salaried persons can claim exemption of Rs 40,000 from their salaries per annum instead of Rs 15,000 medical expenses and Rs 19,200 for transport allowance. Though many are claiming that the saving is not significant but what the taxpayers will be spared is the burden of filling up forms for claiming the deduction of medical and transport expenses. "Salaried taxpayers, pensioners need no documents, bills to claim Rs 40,000 standard I-T deduction on travel, medical expenses," Central Board of Direct Taxes (CBDT) chief Sushil Chandra said.
It is noteworthy that the salaried individuals falling in the 30% tax bracket would end up paying more tax on account of 1% higher cess. The additional tax on account of 1% additional cess surpasses the benefit arising out of standard deduction. Instead of a total of Rs 34,200 exemptions allowed earlier, the standard deduction of Rs 40,000 will now leave an extra Rs 5,800 in the hands of salaried persons. Depending on the tax bracket wherein the salaried person falls, the tax component will increase or decrease.
How Standard Deduction Impacts Your Tax. Details Here
Case 1: In case of 5% tax bracket for those earning between Rs 2.5 lakh to Rs 5 lakh, the gross tax saving on account of re-introduction of standard deduction would be Rs 290 (5% of Rs 5,800). Now the new rules would draw a cess of 4% instead of 3% earlier. This means someone whose taxable income is Rs 3,50,000 then at the rate of 5%, his tax would be Rs 5,000 and 1% additional cess would mean Rs 50 extra tax. And the saving of Rs 290 would further reduce to Rs 240.
Case 2: In case of 20% tax bracket for those earning between Rs 5 lakh and Rs 10 lakh, the tax saving would be Rs 1,160 (20% of Rs 5,800). Someone whose taxable income (say) is Rs 9 lakh then the tax at the rate of 20% would be Rs 12,500 plus 20% of Rs 4 lakh (Rs 9 lakh minus Rs 5 lakh) is Rs 80,000, which means a total income tax of Rs 92,500 (Rs 80,000 plus Rs 12,500). An extra cess of 1% on this tax would be Rs 925. Thus the saving on account of standard deduction would be Rs 235, not much different from the case 1, in fact lower than that.
Case 3: In case of 30% tax bracket for those earning above Rs 10 lakh, the gross tax saving would be Rs 1,740 (30% of Rs 5,800). Someone whose taxable income (say) is Rs 15 lakh, the tax at the rate of 30% would be Rs 1,12,500 plus 30% of Rs 5,00,000 (Rs 15 lakh minus Rs 10 lakh) equals 1,50,000, which means a total income tax of Rs 2,62,500. An extra cess of 1% introduced in this tax would cost the tax payer Rs 2,625. Thus the tax payer would save Rs 1,740, and pay an extra Rs 2,625, which means an extra tax liability of Rs 885.
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