Sensys Blog.

Standard deduction on Salary Income

Section 16, inter-alia, provides for certain deduction in computing income chargeable under the head “Salaries”. it is proposed to allow a standard deduction upto Rs 40,000/- or the amount of salary received, whichever is less.

Consequently the present exemption in respect of Transport Allowance (except in case of differently abled persons) and reimbursement of medical expenses is proposed to be withdrawn.

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

In view of above finance bill 2018 proposes to amend the relevant sections of income tax as given below:

Para 7 of finance bill 2018

In section 16 of the Income-tax Act, after clause (i) [as omitted by section 6 of the Finance Act, 2005], the following clause shall be inserted with effect from the 1st day of April, 2019, namely:––

“(ia) a deduction of forty thousand rupees or the amount of the salary, whichever is less;”.

Implication of above amendments:

Financial consequences:

Before this amendment a salaried class employee can enjoy an exemption of traveling allowance and medical expenses which are available with some conditions and subject to actual expenses incurred by employees for aforesaid purposes. Thus, from financial point of view consequences of the above amendments are summarized as under:

Before amendment		After amendment		New effect
Medical allowance	15000/-	Medical allowance	NIL	Loss 15000/-
Traveling allowance @ 1600 per month or part of the month	19200/-	Traveling allowance	NIL	Loss 19200/-
Standard deductions	NIL	Standard deductions	40000/-	Gain 40000/-
Net effect				Gain 5800/-

From, pure financial prospective the above amendment seems to give a marginal gain in the computation of tax to an employee but the other consequence with flow to employees due to this amendment would have more importance.

Non – financial implications:

Some of the benefits of the same are listed below:-

1. Now employees need not to have proof actual incurrence of expense for claiming exemption as standard deduction is unconditionally available to all employees.
2. Now there would not be any requirement of safe keeping of invoices of medicines and travel tickets for availing exemption.
3. Henceforth, there is no requirement that one should earn his / her income under the head of traveling allowance or medical allowance.
4. Money out of deduction (i.e Rs. 40,000/-) can be save and invested anywhere to earn more income which is not possible earlier.

So in essence, the above amendment is for good of employees as far as ease of assessment and processing of return is concern and will benefit the small earner of salary as now deduction is available without expense.

The above amendment will be applicable in computing income for the financial year 2018-19 or while computing income of year 2018-19 onwards. It is worth to note here that income of FY 2018-19 will be calculated in next year, i.e., 2019-20.