Treatment of Standard Deduction Rs 50000 under the New Tax Regime (FY 2020-21 / AY 2021-22)

The Standard Deduction of Rs 40,000 was first made available in Budget 2018 (FY 2018-19 / AY 2019-20). It replaced the transport allowance Rs. 19,200 and medical reimbursement of Rs. 15,000 per annum.

The Finance Bill 2019-20 had increased this deduction to Rs 50,000 for all salaried employees & pensioners.

To claim this standard deduction, there is no need to submit any bills to your employer(s) or the IT department. As per this new provision, irrespective of amount of taxable salary the assessee will be entitled to get a deduction of Rs 50,000 or taxable salary, whichever is less.

Thus suppose if a person has worked for few days (or) months and his salary was just Rs 50,000 in current financial year, then he/she will be entitled to a deduction equal to salary being the same amount.

If his salary is less, say Rs 30,000 the deduction shall be restricted to Rs 30,000. If salary exceeds amount of Rs 50,000, the deduction shall be restricted to Rs 50,000.

So, ideally your Form-16 will reflect a fixed deduction of up to Rs 50,000 in lieu of Conveyance and Medical allowances w.e.f AY 2020-21.

Let’s now discuss – Is this Standard deduction available under the new tax structure for AY 2021-22? What is the Treatment of Standard Deduction Rs 50000 under the New Tax Regime? What is the applicability of Standard deduction under existing/old and New Tax Structures FY 2020-21?….

Treatment of Standard Deduction Rs 50000 under the New Tax Regime AY 2021-22

Can I claim Standard Deduction (Section 16 (ia) of the Income Tax Act) of Rs 50,000 benefit under the New Tax Regime for FY 2020-21 / AY 2021-22? Let’s understand..

As per the Finance Bill 2020-21, you can now opt for a lower new income tax slabs rates of 15% and 25% in addition to the 10%, 20% and 30% slab rates.

Individuals opting to pay tax under the new lower personal income tax regime will have to forgo almost all tax breaks (tax benefits) that you have been claiming in the old tax structure.

Standard Deduction and also all income tax deductions under chapter VIA (like section 80C, 80CCC, 80CCD, 80D, 80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80G, 80GG, 80GGA, 80GGC, 80IA, 80-IAB, 80-IAC, 80-IB, 80-IBA, etc) will not be claimable by those opting for the new tax regime.

So, Standard Deduction (Section 16 (ia) of the Income Tax Act) of Rs 50,000 for FY 2020-21 / AY 2021-22 is not available under the New Income Tax Regime.

(To know which Income Tax Deductions & Exemptions are allowed under New Tax Regime AY 2021-22, you may kindly go through this article @ Income Tax Deductions under New Tax Regime FY 2020-21 )

Applicability of Rs 50,000 Standard Deduction for AY 2021-22 | Old Income Tax Structure

In case, you wish to opt for old Income Tax Slab rates (as shown in the below table) then you can claim your IT deductions and exemptions.

If you opt for old/existing income tax regime, all Salaried employees can claim up to Rs 50,000 as standard deduction. An individual receiving pension under EPS Scheme is also eligible to claim standard deduction.

However, Family Pension and Annuity (from life insurance company) is considered as ‘income from other sources’, hence SD won’t be applicable. For family pension the applicable standard deduction is Rs 15,000 only.

No standard deduction is available on annuity you purchase voluntarily from an insurance company  

A standard deduction of Rs 50,000 can lower your taxable salary income by a maximum of Rs 15,800.

Old or New Tax Regime? | Which one is beneficial?

As discussed, the Standard Deduction of up to Rs 50,000 is available to all salaried individuals. Whereas, the applicability is dependent on if you choose old or new income tax structure?

So, to claim this deduction, will it be beneficial to opt for the existing/old tax regime instead of the new tax structure?

New or Old rates, which one is better? – There is no straight forward answer to this question. I can present different scenarios proving the current/old tax rates is beneficial and at the same time, can present equal number of tax scenarios to prove that new tax regime is better.

So, it all boils down to ;

• What type & quantum of Income you are receiving
• The structure of your Salary/Income
• Current Savings/Investments
• Future Savings/Investments

Both taxation regimes have their own pros and cons. 

• New taxation regime is better for employees with less salary and less investments resulting in lesser deductions and exemptions. New taxation regime is cleaner and simple, involving lesser or no documentation.
• The new income tax regime may suit those who don’t claim too many tax deductions or want to avoid the paperwork of tax planning. This could include non-salaried taxpayers (including consultants) who are not eligible for standard deduction, tax exemptions and deductions under Chapter VI-A. 
• Senior citizens who do not draw pension from their employer and are therefore not eligible for the standard deduction of Rs 50,000, can also opt for the new tax regime.
  • However, senior citizens who earn a big portion of their income from interest and enjoy an exemption of Rs 50,000 for interest income under the Section 80TTB. They will be better under old/existing regime.
• In general, an individual availing deductions like up to Rs 2 lakhs (like standard deduction and Deductions U/s 80C) he/she can opt for new taxation regime to save more tax.
• Whereas, a person availing very high deductions like HRA, 80C, 80D shall be benefited under old taxation regime by claiming those deductions and saving money.

Continue reading :

1. Why you should think beyond TAX when investing!
2. Income Tax Exemption Vs Tax Deduction Vs Tax Rebate Vs TDS | Key Differences
3. How Income Tax Department tracks the High Value Financial Transactions?

(Post first published on : 17-December-2020)