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Standard deduction for employees: Arun Jaitley's Budget gift is a backhanded relief to salaried class

S Murlidharan
corporate India had made various proposals which would give a boost to their business from a tax perspective

There are times when a victor says he has not won. The salaried class has prima facie wrested a Rs 40,000 standard deduction from the Union Finance Minister Arun Jaitley. But many of them feel they would have been better off without it. And their anger is entirely justified. For, the standard deduction comes with a heavy price---taking away substantially with the left hand what is given by the right! The transport allowance that was exempt subject to a cap of Rs 19,200 would now be taxable. That leaves Rs 20,800 (Rs 40,000 minus Rs 19,200) as standard deduction given the fact most of the employers saw merit in giving transport allowance to the hilt, i.e. Rs 1600 per month or Rs 19,200 per financial year.

Medical reimbursement upto Rs 15,000 was tax-free without conditions and fully exempt subject to conditions. Now all medical facilities provided by the employer would be monetized and taxed. Taking Rs 15,000 as the norm even if it isn't that leaves every employee with a standard deduction of Rs 5,800. In other words, even if viewed with a large heart, the standard deduction boils down to just Rs 5,800. A pittance or a backhanded relief, if you like.

Standard deduction has always been associated with employment-related expenditure like expenditure on purchase and maintenance of uniform, transport expenses to commute from office and back, books and periodicals for keeping oneself abreast of his subject, etc.

It is amazing that the finance minister while keeping alive the exemption to uniform allowance, research allowance, etc., has chosen to strike at medical reimbursements that is not at all employment-related but a touching humanitarian gesture to the employee and his family. This is not to suggest that Jaitley should tax uniform and research allowances that are exempt without limit. The point is these are the employment-related expenses an employee often incurs. A substantial standard deduction could have been a justification for wrenching away employment-related allowances. Be that as it may.

The standard deduction of Rs 40,000 is yet another example of one-size-fits-all approach of our laws. Standard deduction ideally should be on a descending scale---first Rs 5 lakh, 10 percent of the salary, next Rs 5 lakh, 7.5 percent of the salary and the next Rs 5 lakh, 5 percent of the salary and so forth. The reason for granting lesser and lesser standard deductions with increase in salary is the well-heeled big bosses are in any case cosseted with various perks.

Critics wonder why there should be standard deductions when tax slabs could have been tweaked across the board. Jaitley is right in not adopting this seemingly simpler and more democratic line because it is the salaried class which deserves protection from excessive taxation.

A businessman or a professional is presumed to get ample leeway to arrange his tax affairs, including camouflaging his personal expenses as business and cooking up expenses where none were incurred. Presumptive taxation also pampers small traders and small professionals with a low tax. It is the salaried class which needed the finance minister's sympathy, if not indulgence. Jaitley was thus right in not adopting a one-size-fits-all approach by tweaking the tax slabs secularly across the board. But as mentioned earlier, he has given too little by way of standard deductions---Rs 4,200 in real terms when the absolute amount of Rs 40,000 is reduced by what he has taken away with his other hand.

And by the way, Jaitley has not touched perks that are by and large enjoyed by big bosses in an organisation. To wit, a small car provided to an employee is valued at Rs 1,800 per month and a big car at Rs 2,400 per month and taxed accordingly after including it in one's salary income. For the services of a driver another Rs 900 per month is added in both the cases, i.e. irrespective of it being a small or big car. One wonders why Jaitley doesn't mind indulging the big bosses while being strict with the smaller ones.

(The writer tweets @smurlidharan) View More