Impact of Standard Deduction on Salaried Employees

Standard Deduction on Salaried Employees

Standard deduction means the flat deduction of 50,000 Rs from the income which is taxable under the head of salaries. This type of benefit can be claimed irrespective of the amount spent on transport allowances and on medical allowances. However, it’s up to taxpayers to choose whether they want a standard deduction or an itemized deduction. Most individuals choose standard deductions because it isn’t complicated, and one does not need to keep track of every possible qualifying expense.

The standard deduction basically refers to that portion of income that is not subjected to tax or taxable. It can be used to reduce tax bills. The IRS or Indian Revenue Officer who is a bureaucrat adjusts deductions each year for inflation. The amount of standard deduction depends on many factors such as your filing status, age and whether a person is disabled or claimed as a dependent on someone else’s tax return.

• Simplicity in Tax Filing:

The standard deduction offers a straightforward approach to reducing taxable income. Salaried employees don't need to maintain a record of every eligible expense, which simplifies the process of filing taxes.

• No Documentation Hassles:

Unlike itemized deductions that require supporting documentation like receipts and bills, claiming the standard deduction does not demand the burden of organizing and preserving various receipts.

• Universal Benefit:

The standard deduction is designed to benefit all eligible individuals uniformly, regardless of their actual expenses. This ensures that even those with relatively lower expenses can enjoy a tax reduction.

• Time and Effort Savings:

By opting for the standard deduction, employees save time and effort that would otherwise be spent tracking and calculating eligible expenses for itemized deductions.

• Predictable Tax Planning:

Salaried employees can easily estimate their tax liability based on their income and the fixed standard deduction amount. This predictability aids in effective tax planning.

• Benefit to Pensioners:

Pensioners, who might not receive certain allowances like transport and medical allowances that are provided to employees, can still benefit from the standard deduction, enhancing their financial security during retirement.

• Avoiding Overlooked Deductions:

Sometimes, individuals might forget to claim certain eligible deductions while itemizing. The standard deduction eliminates the possibility of missing out on deductions.

• Reduced Record-Keeping Stress:

Claiming itemized deductions requires meticulous record-keeping, which can be overwhelming. The standard deduction eliminates the need for such detailed record management.

• Economic Stimulus:

By putting more money in the hands of salaried employees through reduced taxes, the standard deduction can contribute to increased consumer spending and potentially stimulate the economy.

• Equalizing Tax Benefits:

Standard deduction narrows the gap in tax benefits between salaried employees and self-employed individuals who often have more diverse avenues for deductions.

• Encouraging Compliance:

The simplicity of the standard deduction system encourages compliance among taxpayers, as it reduces the complexity and potential confusion associated with tax deductions.

• Government's Support for the Middle Class:

Governments often introduce standard deductions as a way to provide relief to the middle-class population, acknowledging their role in the economy.

Standard Deduction in Previous Years

In the financial year, 2018-19 the standard deduction amount was 40,000 Rs. Usually, the Indian taxation system allows a flat deduction to individuals earning salaries by working in companies or in organizations or individuals getting pensions.

The standard deduction was then increased to 50,000 Rs in 2019. The taxpayers are not required to submit any disclosures or investment proofs to avail of this deduction. It’s up to the individual taxpayers who can either choose the pre-existing itemized deduction or the standard deduction of Rs 50,000 in the year 2022.

Purpose of Standard Deduction

There are various purposes for standard deductions. These are mentioned below:

• It is done to reduce paperwork and allow for deductions irrespective of the actual expenses.
• The main purpose of the standard deduction is to provide benefits to individuals who are getting pensions.
• To provide tax relief to middle-class salaried individuals.
• It is also done in order to reduce the disparity between tax liabilities and benefits offered to salaried and self-employed individuals.
• This benefit of standard deduction can be enjoyed by both salaried individuals and individuals receiving pensions irrespective of the level of their annual income.

Impact of Standard Deduction on Salaried Employees

The impact of the standard deduction on salaried employees is given below in the table.