It only marginally reduces your taxes, but does away with compliance issues.

Standard deduction of Rs 40000 on income What this means and how it will affect you
news Budget 2018 Thursday, February 01, 2018 - 16:05

With the much-anticipated Union Budget being announced on Thursday, the salaried class looked for respite, but there wasn’t much cause for cheer. However, the government re-introduced a long-standing demand – a standard deduction – of Rs 40,000, in lieu of medical and travel allowance.

What exactly is standard deduction? It’s an amount that you can simply deduct from your taxable income without the need for any proof. Which means, when you’re filing your tax returns this year, if your taxable income is, say, Rs 5.6 lakh, you can simply remove Rs 40,000 from it, and calculate from a starting point of Rs 5.2 lakh. 

But here’s the catch: You cannot claim travel and medical allowance. In the previous financial year (2017-18), the travel and medical allowance were at Rs 19,200 and Rs 15000 per year respectively. 

So in effect, you have a respite of Rs 5,800 on your taxable income for the year. 

The only upside? To avail the allowances, you earlier had to produce bills, which you do not have to do now. (No more begging your local medical store to give you fake bills!)

The standard deduction is not a new concept. Until 2006-07, we were all allowed a standard deduction – which was capped at Rs 30,000 in FY 2004-05. However, standard deduction was abolished in 2006-07.

Experts speak

Experts say that while the deduction may not seem like a huge difference, it will definitely help people who were not using up the full medical or travel allowance. 

“There is benefit as now you are getting a standard deduction of Rs 40,000 vis-a-vis transport and medical benefits. It may benefit those people who were using only up to Rs 5,000 to 6,000. There will be many cases where people were not availing this transport and medical benefits. There is some level of benefit for employees,” said Amarpal S Chadha, tax partner and People Advisory Services at Ernst & Young.

Archit Gupta, the Founder and CEO of ClearTax said that although there is a deduction in taxes, the impact isn’t very great, and that you will have to self-manage your medical expenses.

“If your income is Rs 5 lakh, and you consider the changes in terms of standard deduction and cess, then you save Rs 2,256, which I think is an interesting move because it gives relief to people because everyone always expects lower taxes. It also does away with the requirement to submit medical bills to your employer. It was a big exercise for the employer as well as the employee. There will also be freeing up of compliance for the employer.” 

“But on the downside, there has been a lot of talk about raising the medical reimbursement limit. Since the 80s, the medical reimbursement limit has been kept at Rs 15,000. What it also means is that going forward, there will be a more specific amount attributed to the reimbursement of your medical expenses and therefore there will be a clamour for raising this limit,” he said.

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