Arun Jaitley, the former Finance Minister of India, during the Budget 2018 meeting made a proposal to offer salaried employees a Rs.40,000 standard deduction. The implementation of this standard deduction will mean that the previously offered annual medical reimbursement of Rs.15,000 and the transport allowance of Rs.19,200 will no longer be available to salaried individuals. However, the benefit is not too significant for individuals as the old deduction (Rs.15,000 + Rs.19,200) amounts to Rs.34,200, and since the current limit is Rs.40,000, there is a difference of just Rs.5,800.
Moreover, the tax slab under which an individual falls will determine how much he/she will save through this deduction. For instance, those who fall in the 5% tax slab will be able to save only Rs.290, while those in 20% bracket will be able to save Rs.1,160 and those in the 30% bracket will be able to save Rs.1,740. But, the savings could be nullified for most individuals apart from those who earn an annual income under Rs.5 lakh because cess has also increased from 3% to 4%. As a result, those who earn more than Rs.5 lakh will end up paying more after the standard deduction has been taken into consideration.
The individuals who will get the maximum benefit of this deduction are pensioners as they weren’t offered any kind of standard deduction prior to Budget 2018. The tax payable on the whole deduction amount can be saved, but the additional cess on the remaining income will still have to be paid. At the moment, medical bills to the extent of Rs.15,000 could be claimed as reimbursement by employees, and this amount was exempt from tax. Even the transport allowance of Rs.19,200 could be claimed as an exemption.
Example of Tax Calculation for Individuals
Here is an example of the tax calculation for individuals, assuming the annual income of the individual is Rs.5 lakh:
| Particulars | Current Scenario | After Budget 2018 |
|---|---|---|
| Basic Salary + Dearness Allowance | Rs.3,15,000 | Rs.3,15,000 |
| Medical Reimbursement | Rs.15,000 (non-taxable) | Nil |
| Conveyance Allowance | Rs.19,200 (non-taxable) | Nil |
| Other Taxable Allowances | Rs.1,85,000 | Rs.2,19,200 |
| Gross Salary | Rs.5 lakh | Rs.5,34,200 |
| Standard Deduction | Nil | Rs.40,000 |
| Income from Salary | Rs.5 lakh | Rs.494,200 |
| Income Tax | Rs.12,500 | Rs.12,210 |
| Less: Rebate under Section 87A | Nil | Nil |
| Total Tax Payable Post Rebate | Rs.12,500 | Rs.12,210 |
| Education Cess | Rs.375 (3%) | Rs.488 (4%) |
| Total Tax Payable After Adding Cess | Rs.12,875 | Rs.12,698 |
| Tax-Saving | Rs.177 |
As seen above, the tax-saving amounts to only Rs.177 after taking into consideration the standard deduction of Rs.40,000.
