What is Standard Deduction?
The standard deduction is a flat deduction from salary income that reduces taxable income without requiring any proof of expenditure. Reintroduced in Budget 2018, it replaces the earlier transport allowance (₹19,200/year) and medical reimbursement (₹15,000/year) that required bills and documentation. The standard deduction simplifies tax compliance for salaried individuals and pensioners by providing an automatic deduction from gross salary income.
Currently, the standard deduction is ₹75,000 under the new tax regime and ₹50,000 under the old tax regime for FY 2025-26. It is available to all salaried employees and pensioners regardless of their salary level, nature of employment, or actual expenses incurred. This is one of the few deductions available under both tax regimes, making it universally applicable.
Standard Deduction Under the New Tax Regime
Budget 2024 increased the standard deduction under the new tax regime from ₹50,000 to ₹75,000, making the new regime more attractive. This ₹25,000 increase effectively raises the tax-free income threshold under the new regime. For taxpayers in the 30% bracket, this translates to an additional tax saving of approximately ₹7,800 (including cess).
Under the new regime, the standard deduction is one of the very few deductions available (along with employer NPS contribution and family pension deduction). This makes it particularly valuable as it provides guaranteed tax reduction for all salaried individuals regardless of their investment or spending patterns. The increased limit was specifically designed to make the new regime competitive with the old regime.
Standard Deduction Under the Old Tax Regime
Under the old tax regime, the standard deduction remains at ₹50,000. While this is lower than the new regime’s ₹75,000, the old regime compensates with numerous other deductions (80C, 80D, HRA, etc.) that cumulatively provide larger tax savings for most taxpayers with active investments and deductions. The ₹50,000 standard deduction is claimed automatically by employers while computing TDS.
The old regime standard deduction works alongside other salary-related deductions: professional tax under Section 16(iii) and entertainment allowance for government employees under Section 16(ii). Together, these can provide ₹52,500 or more in salary deductions before Chapter VI-A deductions are applied. The standard deduction doesn’t require any documentation or bills, making it hassle-free.
Eligibility: Who Can Claim Standard Deduction?
Standard deduction is available to all individuals receiving salary income and pensioners receiving pension income (since pension is taxed under the head “Salaries”). Both government and private sector employees are eligible. It applies regardless of the salary amount — an employee earning ₹3 lakh per year gets the same deduction as one earning ₹30 lakh. No proof of expenditure is required.
However, standard deduction is NOT available for income from business or profession, freelance income, or any non-salary income. Self-employed individuals, business owners, and freelancers cannot claim standard deduction — they claim actual business expenses instead. If you have both salary and business income, standard deduction applies only to the salary component. Contract workers on Form 16A (TDS on professional fees) are not eligible.
Impact on Tax Planning
The standard deduction plays a crucial role in the old vs new regime decision. Under the new regime, with ₹75,000 standard deduction and the ₹7 lakh rebate threshold, income up to ₹7.75 lakh is effectively tax-free. Under the old regime, with ₹50,000 standard deduction plus 80C (₹1.5 lakh) and other deductions, the tax-free threshold extends much further for active investors.
For employees considering salary restructuring, the standard deduction replaces the need for transport and medical allowance structures. Since it’s automatic and doesn’t require bills, it’s more reliable than reimbursement-based tax savings that depend on timely bill submission. Factor the standard deduction into your overall tax computation when comparing regimes or evaluating salary packages from potential employers.
Standard Deduction for Family Pension
Pensioners receiving family pension (pension paid to the spouse or children of a deceased employee) also get a standard deduction, but at a different rate. The deduction for family pension is one-third of the pension amount or ₹15,000 (₹25,000 under the new regime), whichever is lower. This is claimed under Section 57(iia) as it’s categorized under “Income from Other Sources.”
Regular pension (received by the retired employee themselves) qualifies for the full standard deduction of ₹50,000/₹75,000 since it’s taxed under “Salaries.” The distinction between regular pension and family pension is important — regular pension from the employer is salary income with full standard deduction; family pension is income from other sources with the limited deduction. Pension from NPS annuity is also treated as salary income with full standard deduction.
History and Evolution
Standard deduction was originally introduced in the 1970s, removed in the 2005-06 budget, and reintroduced in Budget 2018 at ₹40,000. Budget 2019 increased it to ₹50,000. Budget 2024 raised it to ₹75,000 under the new regime while keeping it at ₹50,000 under the old regime. This history shows the government’s recognition of the need for a simple, universal deduction for salaried taxpayers.
The differential rates between old and new regimes reflect the government’s push towards the new regime. Future budgets may further increase the standard deduction (potentially under both regimes) as part of broader tax reform. Some industry bodies have recommended increasing the old regime standard deduction to ₹1 lakh, which would provide additional relief to salaried taxpayers staying in the old regime.
Get Expert Help from TaxHealer
Choosing between tax regimes and optimizing deductions requires understanding all available benefits. TaxHealer’s CAs analyze your complete tax profile including standard deduction impact. Our services start at ₹499. Visit taxhealer.com for expert tax filing and regime comparison.