In a bid to give a boost to salaried taxpayers, Finance Minister Nirmala Sitharaman on Tuesday increased the Standard Deduction limit from 50,000 to 75,000. But the deduction is applicable only in the New Tax Regime, while its limit remains unchanged in the Old Tax Regime.
Commenting on the same, Adhil Shetty, CEO of Bankbazaar.com, said, “The Union Budget’s proposal to raise the standard tax deduction from Rs 50,000 to Rs 75,000 is a crucial move to reduce the financial strain on taxpayers. This increase will offer greater relief by reducing taxable income, enabling taxpayers to save more and enhance their financial well-being. It is particularly advantageous for middle-income earners, as it boosts their disposable income and promotes savings and investment.”
Rahul Jain, President and Head, Nuvama Wealth, said, “The personal income tax in the new regime has seen two significant improvements. Initially, the standard deduction has been raised to Rs 75,000, marking a 50% increase. Additionally, the revision of three income slabs has been implemented. The new regime will result in reduced tax liability, potentially saving up to Rs 17,500, as mentioned in the budget speech. This will put more money in the hands of individuals, boosting personal consumption.”
It may be noted that the standard deduction is a set amount that can be claimed by employees without having to show proof of the actual expenses they have incurred. This deduction has a long history, having been available for many years before being eliminated in 2005, only to be reinstated in the 2018 Union Budget. Initially set at Rs 40,000 in the Budget 2018, the standard deduction was later raised to Rs 50,000 in the following Budget. This deduction was later introduced in the new tax regime in the Budget 2023.
Tax experts were of the opinion that the current standard deduction of Rs 50,000 might not be sufficient to cover the rising costs and expenses related to a higher standard of living. Therefore, there was a necessity to raise its limit. This adjustment would also create fairness with individuals earning income from business or profession, who have the option to claim actual expenses or choose a presumptive basis of taxation.
Additionally, following the pandemic, medical expenses had increased, which also needed to be taken into account when contemplating an increase in the standard deduction. To tackle these issues, there was a popular expectation for the standard deduction to be increased to Rs 1 lakh from the current limit of Rs 50,000.