Impact of standard deduction on salaried individual

Finance Minister Arun Jaitley in Budget 2018 instituted Rs.40, 000 Standard Deductions for salaried class. This additional deduction has been initiated in substitute of current deductions of Rs. 15,000 for medical reimbursement and Rs. 19,200 for transport allowance. The finance minister said the move is for the sake of 2.5 crores salaried employees and pensioners, who normally do not enjoy any allowance for transport and medical prices. Adding to it he also informed that the revenue cost for the government will be about Rs. 8,000 crore. However, educational cess also got hiked from 3 percent to 4 percent for individual taxpayers.

Standard Deductions

Direct deduction from the income of a salaried individual in regard to expenses an employee would face in relation to his employment is known as Standard Deduction. Standard deductions was earlier available for salaried individuals until it got dysfunctional with effect from the assessment year 2006-07. Standard deduction till the assessment year 2005-06, allowed salaried individuals to assert a flat deduction from his or her salary income of Rs.30, 000 or 40 percent of salary whichever less for gross salary Rs.5 lakh or below. And in case of salary exceeded Rs.5 lakh, a standard deduction of Rs. 20,000 was permissible.

Impact

As standard deduction will be introduced in place of medical reimbursements and transport allowance, the net hike in deduction would be a maximum of Rs. 5,800. This would benefit a salaried individual in the highest 30 percent tax bracket to save around Rs.1, 800 in terms of income tax payout.
However, the benefit received from the introduction of standard deductions will get washed away due to the increase in cess from 3 percent to 4 percent.

The advantages arising from standard deduction totally depends on the tax bracket/category a salaried individual lies in.
Here’s how these tax changes will influence your tax liability going ahead in 2018-19 (Assessment Year 2019-20) if you are a salaried employee below 60 years.