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Standard Deduction

Earlier, there was a confusion among the pensioners whose source of income is pension that whether a taxpayer, who receives pension from his former employer, shall be eligible to claim Standard deduction.

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That confusion has been removed by the Central Board of Direct Taxes (CBDT) by issuing clarification that the pension received by a taxpayer from his former employer is taxable under the head “Salaries”. The Finance Act, 2018 has amended Section 16 of the Income–tax Act, 1961(“the Act”) to provide that a taxpayer having income chargeable under the head “Salaries” shall be allowed a deduction of Rs 40,000/- or the amount of salary, whichever is less, for computing his taxable income. Accordingly, any taxpayer who is in receipt of pension from his former employer shall be entitled to claim a deduction of Rs 40,000/- or the amount of pension, whichever is less, under Section 16 of the Act.


Standard Deduction is nothing but a fixed amount of deduction, in this case, an amount of Rs 40,000 which can be reduced by taxpayers receiving salary income, from their gross salary. The provision of Standard Deduction was earlier available but managed to get abolished in the Finance Act 2005. It is also proposed that this deduction would replace the existing transport allowance of Rs 1600 per month and medical allowance of Rs 15,000 per annum which are usually deducted from the gross salary and claimed as an exemption. The government has proposed requisite amendments to Section 17(2)(viii) of the Income-tax Act, 1961.

Now, if the standard deduction of Rs 40,000 replaces medical allowance of Rs 15,000 and transport allowance of Rs 1600 per month i.e. 19,200 per annum, the effective additional benefit on account of the standard deduction would be an additional income exemption of Rs 5,800.

However, pensioners will benefit substantially as earlier they did not get any standard deduction or any of the other allowances given to salaried employees. They would save tax payable on this entire amount of deduction but of course have to pay the increased cess on the balance income.

Sources:

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