Prior to its abolishment in 2005, Standard Deduction had allowed a salaried employee to claim a flat deduction from salary income of Rs 30,000 or 4o percent of salary if such salary did not exceed Rs 5 Lakhs, or a deduction of Rs 20,000, if such salary exceeded Rs 5 lakh. After 2005, when standard deduction was withdrawn, hope before every budget thereon by every employee was for the standard deduction to be brought back. This hope has been fulfilled by the Budget 2018 that was presented by the Finance Minister, Arun Jaitley who announced a standard deduction of Rs 40,000. Further, the minister said that medical allowances will continue separately.
The withdrawal of standard deduction in 2005 was in every way discriminatory against salaried taxpayers. Taxable income could be brought by deducting all expenses that one could prove that had to be made toward carrying out the business, this worked very well for those individuals who had businesses or were professionals but not a salaried person who unlike the business person or a professional, enjoyed only a few tax-free allowances.
Another issue that is faced by the salaried employees is reimbursement of claims. The tax-free limits for allowances that can be availed by the salaried employees are fixed by the Government whereas reimbursement of claims creates another hurdle for these salaried employees the reason for it being that most companies impose caps for reimbursement of expenses.
Standard Deduction will now also allow for a flat deduction from salary income, which will be for making up for some of the expenses that an employee would normally incur in relation to his employment.