How can salaried employees calculate standard deduction for FY 2023?

Suresh Surana, Founder, RSM India

Section 16(ia) of the Income Tax Act, 1961 (hereinafter referred to as the ‘IT Act’) provides that every salaried taxpayer can claim a deduction of up to Rs. 50,000. Further, taxpayers in receipt of pension income will also be eligible to claim such standard deduction. The quantum of such deduction shall be the salary/pension amount or Rs. 50,000.

It is pertinent to note that such standard deduction was allowed as a deduction only for those taxpayers who opted for the old tax regime. However, Budget 2023 has now proposed to allow such standard deduction for taxpayers opting for the proposed new tax regime under section 115BAC of the IT Act in the financial year 2023-24.

An illustration for claiming such standard deduction is given below:

Every taxpayer can claim the benefit of standard deduction at the time of furnishing his tax return in ITR 1/ITR 2. Once the gross salary/pension amount is entered correctly by the taxpayers, the amount of standard deduction is auto-populated in the Income Tax Online Return/Utility. However, taxpayers should confirm whether the said deduction has been correctly computed under point iv(a) of section 16(ia) of Part B – Gross Total Income Schedule.

Kuldeep Parashar, CEO and co-founder of Pensionbox

In India, pension is an essential source of income for retired persons, but it comes with tax liabilities. Taxes on pension are calculated under the standard deduction in income tax. Standard deduction is calculated on the basis of various factors like basic salary, perquisites, nexus, rent allowance and other non-taxable and taxable charges.

Taxpayers receiving pension can be divided into two categories – senior citizens and very senior citizens, where they can opt for the old or new tax regime under the appropriate categories, and have different tax slabs. Senior citizens are those who are below 80 years of age, while ultra senior citizens are above 80 years of age. The basic exemption limit for senior citizens is Rs. 3 lakh, while very senior citizens do not have to pay any tax for filing returns up to Rs. 5 lakhs annually on the total income.

Since, senior citizens receiving pension from their previous employers are liable to tax under the head ‘Salaries’, to understand this let us take an example- A 70 year old family member is getting a pension of Rs. 50,000 will be classified as Senior Citizen and the subject salary is Rs. 30,000 (5% on 2nd slab + 20% of 3rd slab up to 3 lakhs without tax). Whereas, family members above the age of 80 years and receiving a pension of Rs. 50,000 will be classified as super senior citizen and will be paid only Rs. 20,000 (20% of 2nd slab up to 5 lakhs without tax).

Under section 16 of the IT Act, pensioners are entitled to claim a deduction of Rs. 50,000 per annum or the amount of pension, whichever is less. This deduction has helped in reducing the financial burden on senior citizens. Also maximum tax savings can be done by exploring options like NPS, PF, FD and other insurances. Even though the tax liabilities on pension in India are significant, taxpayers can reduce them by understanding the standard deduction, tax slabs, deductions and reinvestment under the IT Act. Therefore, we stress the importance of planning for retirement finances well in advance to ensure a comfortable retirement.

Archit Gupta, Founder and CEO, Clear

standard deduction up to max. 50k is available on both salary income and pension income. This is automatically applicable if the amount is entered under the head Income from Salaries or Pension Income.

Filers on Cleartax will see, these amounts are automatically applied and deduction up to Rs 50,000 is claimed.

Also, FY 23-24 and 24-25 will be the same except FY 24-25 will now also have the standard deduction under the new regime. Earlier it was only under the old regime.