Budget 2018 gives Rs 40,000 standard deduction, removes other allowances: Salaried may be left poorer

Budget 2018 proposes to provide a standard deduction of Rs 40,000 from salary income to employees but also proposes to take away existing annual transport allowance of Rs 19,200 and Rs 15,000 medical reimbursement. Prima facie income exempted from tax after setting off the gain and loss is Rs 5800 only. The tax saved for each employee on this income would depend on the tax slab that income falls into. The saving in tax would be Rs 290 for those currently paying 5% tax on this income; Rs 1160 for those paying 20% tax on this income; and Rs 1740 for those paying 30% tax on this income. However, these savings would be nullified in most cases, except in the case of income up to Rs 5 lakh, due to increase in the cess payable from current 3% to 4% on the rest of the income tax payable by the individual. As a consequence, individuals with income above Rs 5 lakh would end up shelling out more tax after taking into account the standard deduction, the removal of the allowances and the increase in cess. (Refer tables below for calculations)

However, pensioners will benefit substantially as earlier they did not get any standard deduction or any of the other allowances given to salaried employees. They would save tax payable on this entire amount of deduction but of course have to pay the increased cess on the balance income.
Currently, medical bills of up to Rs 15000 were reimbursable to employees tax free per financial year by employers. A tax-exempt transport allowance of Rs 19200 per financial year was also allowed to be paid to employees.

Standard deduction is essentially a flat amount subtracted from the salary income before calculation of taxable income. The standard deduction was a part of the Income-tax Act until former finance minister, P. Chidambaram, withdrew it in the Union budget of 2005-06. Standard deduction allowed the salaried class to take care of expenses that didn’t come under the purview of the income tax rules.
The standard deduction that was allowed was equivalent to Rs 30,000 or 40% of the income, whichever was lower, for salaried employees earning an annual income between Rs 75,000 and Rs 5 lakh. There was also a limit set for standard deduction at Rs 20,000 for those earning more than Rs 5 lakh.

The simplicity of calculation of standard deduction was its main advantage. It was given as a straight deduction from the income chargeable under the head salary. It did not require any disclosures, investment proofs or bills.

It had put the salaried tax payers at par with the consultants, self-employed and freelancers who are allowed to take deductions on expenses incurred for earning that income.