Budget 2018: Standard deductions for salaried individuals

Although many were expecting it, in the Union Budget 2018, there is no proposal for changing the structure of income-tax slabs. It was expected that the slabs would be restructured to bring down the tax liability of individual taxpayers. There was some relief for individuals as the government has proposed to reintroduce the standard deduction for salaried individuals—it had been abolished by the Finance Act, 2005. However, the reintroduction of this benefit would not make too much of a difference in the total tax outgo of individual tax assesses.

The maximum benefit that a taxpayer in the highest tax bracket (of 31.2%) would be able to derive from a standard deduction of Rs40,000 would be just about Rs1,810—as it has been made available in lieu of the existing medical reimbursement and transport allowances. Besides reintroducing standard deduction, the finance minister did not propose any other major relief in the direct taxes space. However, he has proposed a slight increase in the education cess, which is charged on the amount of income tax payable. This is to be increased to 4% from the existing 3%. Let’s read more about the budget proposals related to personal tax.

Standard deduction

The Union Budget has proposed to reintroduce standard deduction for salaried individuals to the tune of Rs40,000 a year. In his speech, Finance Minister Arun Jaitley said, “Income tax data analysis suggests that major portion of personal income-tax collection comes from the salaried class. For assessment year 2016-17, 1.89 crore salaried individuals have filed their returns and have paid total tax of Rs1.44 lakh crore, which works out to average tax payment of Rs76,306 per individual salaried taxpayer. As against this, 1.88 crore individual business taxpayers, including professionals, who filed their returns for the same assessment year paid total tax of Rs48,000 crore, which works out to an average tax payment of Rs25,753 per individual business taxpayer. Therefore, in order to provide relief to salaried taxpayers, I propose to allow a standard deduction of Rs40,000 in lieu of the present exemption in respect of transport allowance and reimbursement of miscellaneous medical expenses.”

At present an individual can claim tax-free transport allowance of up to Rs1,600 per month and medical reimbursements of up to Rs1,250 per month. Together, these two allowances currently amount to a maximum of Rs34,200 a year. Considering that the proposed standard deduction is in lieu of these two, which are currently available, the net increase in deduction would be a maximum of Rs5,800. This would help an individual in the highest tax bracket to save up to Rs1,810 in terms of tax outgo.

“It will hardly make any difference,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP. However, “The only benefit would be that now an employee will not be required to submit bills to her employer to claim the benefit,” added Maheshwari. Once the budget proposal is approved, they will take effect from 1 April 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent years.

Increase in cess

There is an increase in the rate of cess charged to both individual and corporate taxpayers. From the current cess of 3% (2% for primary education and 1 % for secondary and higher education), a health and education cess of 4% will be levied on the tax payable from the financial year 2018-19. As a result, if you had a tax liability of Rs1 lakh in the assessment year 2017-18, and paid a cess Rs3,000; then from the assessment year 2019-20—if your taxable incomes remains Rs1 lakh—you would have to pay a cess of Rs4,000.livemint