How Will Standard Deduction Impact Your Taxes?

Posted By: Kavinkal Satyanarayan
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Standard deduction is an income tax provision applicable to salaried tax payers. It is deducted from gross salary while computing taxable income. It is meant to provide some relief to salaried tax payers to offset expenditure typically incurred due to their job or employment.

How Will Standard Deduction Impact Your Taxes?

The standard deduction provision was dropped from the IT Act 1961 in 2005 and has now been reintroduced in the budget 2018. The standard deduction now allowed is Rs 40,000. The gross salary is reduced by the standard deduction to arrive at the taxable income.

The effect on tax calculation is to shift the tax slab upwards by Rs 40,000. For e.g. the nil tax rate slab now shifts from below Rs 2,50,000 to below Rs 2,90,000. A similar effect will follow on other tax slabs too. An illustrative example to demonstrate the impact of standard deduction on existing tax slabs is as follows:

Income Tax Slab  Tax Rate  Tax without SD    Tax with SD      Benefit     
2,90,000Nil2,000Nil2,000
4,00,0005%7,5005,5002,000
8,00,00020%72,50064,5008,000
12,00,00030%1,72,5001,60,50012,000


By way of disclaimer, the foregoing table applies to particular category of tax payer and is generally illustrative of the impact of standard deduction provisions. There are any number of interrelated issues that affect tax calculation and this oversimplification is only to convey a point.

But even this illustration ignores the fine print of the Budget 2018. Standard deduction is one of the provisions of Section 16 of the IT Act. There are other related provisions in section 16 which impact standard deduction. Two other provisions in this section relate to transport allowance and medical reimbursement.

There was an existing provision in the previous budget for exemption of transportation allowance up to Rs 19,200 and medical reimbursement up to Rs 15,000, net amounting to Rs 34,200. While introducing the standard deduction of Rs 40,000 the other two earlier provisions have been dropped. Hence the net effect is much lesser. Even this is moderated because of the 1% additional cess introduced in the budget

Ignoring the 1% cess the net impact of the budget announcements is to depress gross salary by Rs 5,800 and not Rs 40,000 as stated earlier.The table must be now modified as follows:

Income Tax Slab  Tax rate  Tax without SD  Tax with modified SD   Benefit
2,90,000Nil2,0001,710290
4,00,0005%7,5007,210290
8,00,00020%72,50071,3401,160
12,00,00030%1,72,5001,70,7601,740

 
Add 1% Cess to the income tax computed above and the result is only serial 1 and 2 are benefitted, all else pay more.

However, it is not as if everyone is subject to the tyranny of the second table. There are any number of tax paying salaried workers who do not enjoy the tax benefit of transportation allowance and medical reimbursement. Pensioners are certainly beneficiaries. There will also be several people who will be between the two levels. But yes, most employees will fall in the second lot.

An unintended impact of the budget announcement on standard deduction is the simplification of the corporate pay slip. The corporate payslip has any number of serials and sub serials that it has already started looking like a government salary sheet.

The corporate HR did it, ostensibly with the benevolent intention of reducing the tax burden on associates. That it has the effect of leaving the said associate completely confused and baffled best remain unsaid. Also, when it is time to finalise the TDS, the HR will expect you to submit all kinds of self-attested receipts obtained for payment towards imaginary services, full with GST number.

Now at least two serials in the payslip have become redundant along with the attendant effect of fewer receipts to be deposited with HR. Which of course leaves the HR to find newer ways to pursue their benevolent intentions. Be that as it may, life will be business as usual, till the ERP is modified or at least till the next appraisal. Such is the impact of the Finance Minister's announcement on standard deduction.

Read more about: standard deduction, income tax, taxes
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