Why Senior Citizens Are Real Beneficiaries Of Flat Deduction Of Rs 40,000

Standard deduction does not require any documentation.
Standard deduction does not require any documentation.

Budget 2018-19 offered a gift to income tax payers - that of standard deduction of Rs 40,000 from taxable income. Even as the government meant to extend it all citizens, even pensioners, there was some confusion among tax payers as to whether this rule would encapsulate pensioners or not. Recently the government issued a clarification mentioning that pension qualifies as salaried income and thus, pensioners too are eligible to benefit from flat deduction of Rs 40,000 from their taxable income.

"The Central Board of Direct Taxes (CBDT) has clarified that the pension received by a taxpayer from his former employer is taxable under the head "Salaries". The Finance Act, 2018 has amended Section 16 of the Income-tax Act to provide that a taxpayer having income chargeable under the head "Salaries" shall be allowed a deduction of Rs. 40,000 or the amount of salary, whichever is less, for computing his taxable income. Accordingly, any taxpayer who is in receipt of pension from his former employer shall be entitled to claim a deduction of Rs. 40,000 or the amount of pension, whichever is less, under Section 16 of the Act," said the Central Board of Direct Taxes (CBDT).

(Also Read: Standard Deduction Of Rs. 40,000 Available For Pensioners. Details Here)

If the pension to be received in the financial year 2018-19 is Rs. 36,000, then the entire amount is allowed as deduction. If the pension to be received is Rs. 60,000, then the maximum deduction allowed will be Rs. 40,000 and the balance of Rs. 20,000 will be taxable. Even this balance will be subject to the minimum income not subject to tax, (eg. Rs 3,00,000 for senior citizens).

"If a senior citizen pensioner receives Rs. 3,40,000 of pension, Rs. 40,000 is allowed as standard deduction and the balance is within the limit of Rs. 3,00,000 on which no tax is to be paid," explained Professor Rajiv V Shah, T. A. Pai Management Institute.

Before the government introduced the concept of standard deduction this year, it used to allow for deduction in the form of medical reimbursements and transport allowance. In order to claim these deductions, tax payers had to provide adequate proof of incurring such expenses. But standard deduction does not require any documentation.

However, earlier, pensioners were unable to avail the benefit of deduction on the basis of medical reimbursements and transport allowance, because they are not in active employment. But now they will get a flat deduction of Rs 40,000. "It is a mature step to extend this benefit to senior citizens of the country," said Chartered Accountant Deepak Kumar Agarwal, who works in a pharma company.

 (Also Read: New Income Tax Return (ITR) Forms Seek More Salary Details: 10 Points)

"As the pensioners were not getting the benefits of medical reimbursement and transport allowance, they will now get the benefit of Rs 40,000 or the pension amount, whichever is lower. This is a good respite for pensioners,"  Dr. Rajendra Kumar Sinha, Professor and Chairperson, Centre of Excellence in Banking IFIM Business School, told NDTV.

Dr DS Rawat, Chartered Accountant and Partner, Bansal and Company, said that the real beneficiaries of standard deduction from income tax are actually pensioners, not the salaried individuals.

(Also Read: New Rs. 40,000 Standard Deduction: How It Impacts Your Income Tax)

Since standard deduction is being offered in place of medical reimbursements and transport allowance, the net increase in deduction would be a maximum of Rs. 5,800. So a salaried individual in the top 30 per cent tax bracket will be able to save around Rs. 1,800 in terms of income tax outgo. On top of it, the increase in cess from 3 per cent to 4 per cent for individual taxpayers has also diluted the benefits of standard deduction. "Regular employees will benefit only up to Rs 17,000 per year in their tax outgo on the basis of standard deduction. The real beneficiaries are pensioners," said Mr Rawat.