Budget’s New ‘Standard Deduction’ May Mean More Tax, After All

The deduction will be neutralised by the inclusion of transport and medical allowances in the taxable bracket.

Finance Minister Arun Jaitley on Thursday, 1 February provided little relief to salaried class as benefits under the proposed Rs 40,000 standard deduction will be neutralised to a large extent by inclusion of transport and medical allowances in the taxable bracket, and the 1 percent hike in health and education cess.

Already the individual tax payer was getting benefit of Rs 19,200 p.a. under transport allowance and Rs 15,000 p.a. under the medical allowance. Both these components add to the tax benefit of Rs 34,200 per annum.

So, if you fall under the Rs 5 lakh p.a. bracket, here’s what you effectively gain:

If you fall under the Rs 25 lakh p.a. bracket, you are paying more tax than earlier:

According to Parizad Sirwalla, partner (tax), KPMG, the withdrawal of annual tax free transport allowance and medical reimbursements has squared off the benefit on account of standard deduction.

An annual incremental net reduction of Rs 5,800 in income results into tax savings of Rs 302 and Rs 2,081.

Sirwalla to PTI

At the same time, Sirwalla said, maximum tax rate overall has increased to 35.88 percent from existing 35.53 percent taking into account 1 percent increase in education cess.

"In order to provide relief to salaried taxpayers, I propose to allow a standard deduction of Rs 40,000 in lieu of the present exemption in respect of transport allowance and reimbursement of miscellaneous medical expenses," Jaitley said in his Budget speech.

This decision to allow standard deduction shall significantly benefit the pensioners also, who normally do not enjoy any allowance on account of transport and medical expenses, he said.

"The revenue cost of this decision is approximately Rs 8,000 crore. The total number of salaried employees and pensioners who will benefit from this decision is around 2.5 crore," the minister said.

According to Neeru Ahuja, Partner Deloitte India, on the taxation side, industry and individuals are "little disappointed that no significant tax relief has been provided in spite of increased compliance by taxpayers."

(with inputs from PTI)