Standard deduction U/s 16(ia) | Calculating taxable income for an individual involves calculating gross
income. Gross income is the total income under various heads of income. You can reduce your gross
income by taking various deductions and allowances to get the final taxable income. These deductions
can be deducted under sections 80C, 80D or standard income deduction from your salary or
homeownership. Net income after this deduction is subject to tax at the respective flat rate applicable
to the taxpayer.
The standard wage deduction was first introduced in 1974. But the government abolished it in 2005. The government reintroduced it into the 2018 Union budget. After its reintroduction, the government introduced several employee benefits. These include an increase in the standard deduction benefit for the financial year 2021-22. Before discussing the benefits, let's understand what the standard deduction is.
What do you mean by standard deduction?
There have been many changes in the
standard deduction in
Previously, employees could claim travel and medical expenses only after submitting proof. But for the standard deduction, it is not necessary to present proof of expenses. Not only employees, but employers are also at an advantage as they no longer have to process their bills.
Now, there are two types of
standard deductions available in
When a person receives rental income from homeownership, they are included in the income from homeownership. The standard deduction for the 2020-21 valuation year under Real Estate Income is 30%.
However, the standard deduction under the payroll is a default deduction. We subtract this from the individual's wage income to reduce the taxable amount. Only a salaried person or a person applying for a pension can benefit from it.
Each employee can request the benefit of the ordinary deduction for the financial year 2021-22. The move provides significant tax breaks for employees. Let's try to understand in detail how the standard deduction in section 16 (IA) benefits the employee.
Standard Deduction in Salary Income
Net salary is the total sum of salary, pension, tip, compensation, commission minus any deductions under section 10 of the Income Tax Act. Section 10 covers allowances such as renting a house and transportation.
The government reintroduced the standard deduction from the 2019-20 valuation year. Previously, the government waived the transportation allowance of Rs 19,200 and the medical allowance of Rs 15,000. Salaried individuals can deduct a fixed amount of Rs 40,000 in the 2019-20 valuation years. But they could no longer deduct transportation and medical allowance.
From AY 2020-21, a standard deduction of Rs 50,000 is available for all salaried individuals. Any medical and travel allowances are not yet applicable.
Please note that the flat-rate deduction for salary cannot, in any case, exceed the amount of the salary. In other words, the maximum amount of deduction you can get under section 16 is Rs 50,000 or less for the salary amount.
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