Budget 2020 Expectations for Standard Deduction: The increase in the limit of standard deduction could be one of the key initiatives of the government to give some relief to the salaried class taxpayers and simultaneously manage the fiscal deficit.
Budget 2020 Expectations for Standard Deduction: Finance Minister Nirmala Sitharaman will present her second Union Budget on February 1, 2020. After the government slashed corporate tax rates a few month ago, individual taxpayers’ hopes for a similar relief in the form of higher tax slab limits or reduction in tax rates are quite fair. While the government may have limited room to reduce the personal tax rates due to the challenge on the fiscal deficit side, it may resort to provide other tax reliefs to ease the tax burden on the middle-class salaried taxpayers.
Although the government in the past budgets has given certain reliefs to the salaried class taxpayers in terms of no tax up to income of Rs 5 lakh, introduction of standard deduction etc., however, overall these deductions or reliefs available to them are not adequate which eventually results into higher tax withholding and lower take home salary every month.
The salaried class bears the brunt of taxes on account of unaligned tax rules for different taxpayers. Since there aren’t many significant exemptions or deductions available to them (except HRA, LTA, etc. to name a few), there is an expectation that the government should raise the limit of standard deduction substantially. What is this standard deduction?
The Finance Act, 2018 introduced a standard deduction from salary income to the extent of Rs 40,000. However, in lieu of such a deduction, the exemption for transport allowance of Rs 19,200 per annum and medical expenses reimbursement of Rs 15,000 per annum were withdrawn. Effectively, the incremental relief was just Rs 5,800 per annum.
Subsequently, this limit for standard deduction was raised from Rs 40,000 to Rs 50,000 for the financial year (FY) 2019-20. On the positive side, the employees get flat deduction without the hassle of furnishing supporting documents or bills. However, the limit not only fails to keep up with the actual expenditure which an individual incurs now a days on medical, travel, etc., but also it is inadequate when compared to benefits available to a business class taxpayer. A business class /professional individual taxpayer having its own independent business or profession, enjoys the benefit of claiming deduction for all the actual expenses incurred i.e. travel, printing and stationery, books and periodicals staff salary, vehicle running and maintenance expenses being incurred for carrying out business activities /exercising profession.
Watch: What is Union Budget of India?
It is important to note that the key purpose of the standard deduction is to put salaried class individuals at par with individuals earning professional income with respect to providing deduction of expenses incurred for earning income. Hence, it is only fair for the government to increase this limit of standard deduction from the existing Rs 50,000 to cover all the expenses of a salaried individual.
Another issue is that the limit for standard deduction is the same irrespective of the salary range of an individual. For example, the employees drawing salary of Rs 5 crore per annum as well Rs 5 lakh per annum are eligible for the same standard deduction of Rs 50,000. Is this justifiable?
Here, it is important to discuss that the concept of standard deduction is not new. In fact, till FY 2004-05, such deduction was based on the percentage of salary drawn by an employee. For individuals who were earning salary income up to Rs 5 lakh, the standard deduction was allowed to the extent of 40% of the salary or Rs 30,000, whichever is less. For salary income exceeding Rs 5 lakh, a deduction of Rs 20,000 was allowable. Later, this provision was deleted in view of the broadening of income slabs proposed in the Finance Bill 2005.
Considering this, it is equally fair for the Finance Minister to consider increasing the standard deduction limit up to Rs 1,00,000 for individuals having salary income up to Rs 10,00,000. For salary income exceeding Rs 10,00,000, deduction could be based on percentage of salary, subject to a maximum cap.
The government has addressed the supply-side constraints by slashing the base corporate tax rates to 22% (for existing companies) and 15% (for new manufacturing companies incorporated after 1 October 2019), resulting into effective tax rates of 25.17% and 17.16%, respectively. However, they should now focus on demand side constraints and provide impetus to the economy by giving a boost to the consumption.
With the super-rich tax introduced last year, the effective tax rates for non-corporate taxpayers earning taxable income above Rs 2 crore and Rs 5 crore went up to 39% and 42.74%, respectively. The standard deduction limit may be made more progressive, which could vary with salary levels, thereby giving benefit to the salaried class taxpayers at par with other individual taxpayers.
To sum up, in order to encourage the consumption and boost the growth of economy, it is imperative to increase the disposable income in the hands of individual taxpayers. The increase in the limit of standard deduction could be one of the key initiatives of the government to give some relief to the salaried class taxpayers and simultaneously manage the fiscal deficit.
(By Akhil Chandna, Director-Grant Thornton India LLP, with inputs from CA Khevna Gandhi)