In a respite to senior citizens, the Central Board of Direct Taxes (CBDT), on 5 April, issued a clarification stating that standard deduction is also available to taxpayers whose source of income is pension.
The benefit of standard deduction adds to the list of goodies that Budget 2018 had to offer to senior citizens.
As per the amendment made through Finance Act 2018 in section 16 of the Income-tax Act, 1961, a person having income from salary can claim a deduction of up to Rs40,000 as standard deduction. CBDT stated in the clarification that pension received by a taxpayer from a former employer is taxable under the head “salaries", so any person receiving pension shall be allowed a deduction of Rs40,000 for computing taxable income.
Remember that standard deduction has been introduced in lieu of the earlier exemptions, including transport allowance and reimbursement of miscellaneous medical expenses, which have been rolled back.
Tax-free transport allowance and medical reimbursement that an individual was entitled to claim was up to Rs1,600 per month and Rs1,250 per month, respectively. Together, these two allowances amounted to Rs34,200 per year.
Considering that standard deduction comes in lieu of these two allowances, the net increase in annual deduction would be just Rs5,800 (Rs40,000-34,200), which will help save Rs1,810 for a person in the highest tax bracket.
The good part is that employees won’t need to submit any documents or bills to claim standard deduction anymore. Earlier, employees were supposed to produce these to claim transport and medical reimbursements.
Standard deduction has been made available from FY 2018-19 and will accordingly apply in relation to the assessment year 2019-2020.