What is the standard deduction in income taxes & how it's calculated?


12 Jun 2023

Understanding the Benefits and Calculation of Standard Deduction in Income Taxes

Tax deductions offer several benefits to taxpayers. Salaried individuals especially look forward to utilizing ways to avail tax deductions and exemptions so that they have to pay less tax. Let us see what these deductions are, how to calculate them, and how you can avail them to reduce your overall tax bill.

Standard deduction in income tax

A standard deduction under Section 16 of the Income Tax Act, 1961, is defined as the portion of income not subject to tax deductions that could be used to reduce your overall tax bill. This deduction is applicable to all salaried employees and pensioners, irrespective of their earnings. Standard deductions from 2019 offer a flat deduction of INR 50,000 on the taxable income of salaried employees and pensioners. The amount you can avail as a deduction is dependent on your filing status, age, presence of a disability, and if you are dependent on someone else's tax return or are independent.

Benefits of standard deductions

Standard deductions offer the following benefits to taxpayers:

  1. It reduces the tax liability on taxpayers like salaried individuals and pensioners who are already subject to TDS (tax deducted at the source).

  2. No paperwork is required to claim these Standard deductions on one's income, thereby reducing the paperwork required to claim the benefit as no proof needs to be shown when claiming tax benefits under it.

Eligibility criteria for standard deductions

To be eligible to get a standard deduction on one's income, one must be a salaried or retired individual. The following people cannot avail of the benefit of standard deductions under Section 16:

  1. Self-employed individual taxpayers

  2. Individual taxpayers who have opted for the new tax regime

  3. HUF or any other non-individual, i.e., institutional taxpayer, irrespective of the tax regime.

How to calculate standard deduction?

Salaried individuals can claim standard deductions of INR 50,000 on their annual salary, irrespective of how much they earn. So, if someone earns INR 12 lakh annually and they claim a standard deduction, their Net Taxable Income will be counted as INR 11.5 Lakhs. Opting for standard deductions in this manner will allow this particular individual to save around INR 15,000 on his/her taxes.

Standard deductions are, therefore, useful for people looking to save some money on their income tax. However, some people may question if this would benefit them at all. It is, therefore, wise to compare your tax liability using an income tax calculator or to take the help of a tax consultant. This will allow you to understand how standard deductions will help you and how you should apply for them.

One must also note that these deductions are not available for those who choose the new tax regime. Therefore, compare your taxes under both regimes and then decide which will be more beneficial to you as a taxpayer. This is because choosing the new tax system will mean that you will have to forego some previously accessible tax deductions like House Rent Allowance (HRA) and Leave Travel Assistance (LTA).

Know about income Tax deductions under 80C by clicking here.

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Income Tax deduction under 80C

Team Kotak GIC

The content of this blog has been created and carefully reviewed by the esteemed team at Kotak General Insurance, with the sole purpose of providing valuable guidance and sharing insights on the importance of general insurance. Our objective is to assist users in making informed decisions when purchasing or renewing insurance policies for their cars, bikes, and health. Our expertly curated information aims to empower our readers with the knowledge they need to protect their valuable assets and financial interests.