Among the many expectations of the salaried class from this year’s interim budget, one key expectation is the increase in the standard deduction limit to provide them with more disposable income.
It may be noted that standard deduction is a fixed deduction available to salaried individuals without the need for providing evidence of actual expenses incurred. Section 16(ia) of the Income Tax Act, 1961 allows salaried individuals filing their return of income under the old tax regime to claim a flat standard deduction of Rs 50,000 against their salary. The Finance Act 2023 extended such benefit to salaried individuals opting for the concessional tax regime u/s 115BAC of the I-T Act.
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Historically, this deduction was available for many years, but in 2005, this was removed only to be reintroduced in the 2018 Union Budget. Although the standard deduction was initially set at Rs 40,000 in the Union Budget 2018, it was later increased to Rs 50,000 in the Budget 2019. However, the increased limit of Rs 50,000 was limited to the old tax regime. The Union Budget 2023, in a bid to make the new tax regime more attractive, allowed standard deduction of Rs 50,000 to taxpayers opting for the new regime as well.
The current deduction of Rs 50,000, however, is deemed insufficient to cover the escalating costs and expenses associated with the higher standard of living and, thus, there is a need to increase the limit of this deduction.
“This adjustment would also bring parity with individuals earning income from business or profession, who can claim actual expenses or opt for a presumptive basis of taxation, where a certain percentage of gross income is considered as an expense. Moreover, post the pandemic, there has been an increase in medical costs, which should be factored in when considering an increase in the standard deduction. To address these concerns, the government could consider increasing the standard deduction to Rs 100,000,” says Divya Baweja, Partner with Deloitte Touche Tohmatsu India LLP.
“The standard deduction was re-introduced by government in financial year 2018-19 with an amount of Rs 40,000 and enhanced to Rs 50,000 from financial year 2019-20. The benefit of standard deduction has been made available to the salaried individuals opting for concessional tax regime with effect from financial year 2023-24. Given the year-on-year inflation and rise in cost of living, the government may consider increasing the standard deduction to Rs 1,00,000,” informs Shuddhasattwa Ghosh, Tax Partner, EY India.
Dr. Suresh Surana, Founder, RSM India, has similar views. He says, “Considering the said limit of standard deduction was last revised in 2019 (i.e. increased from Rs. 40,000 to Rs. 50,000) and the current inflation rates, it would be fair to increase the said limit from Rs 50,000 to Rs 1,00,000. Alternatively, such standard deduction may be linked to the Cost Inflation Index similar to manner for computing the indexed cost of acquisition for capital gains.”
Tax experts say that in the Union Budget 2023 the government had made it very clear that the new scheme of taxation would be the scheme for the future. Hence going forward, there would be no deduction on the investments which are now available u/s 80C.
“However, a special carve out was made for standard deduction, which was introduced in the new scheme also in addition to the old scheme. Conceptually, standard deduction is supposed to take care of expenses which are not allowed as deduction under income tax rules. No bills are required to be produced for claiming standard deduction. However, the standard deduction has been kept as Rs 50,000 since the last 5 years. Considering an inflation of 5%-6% yearly, the standard deduction should be enchanced to Rs 65,000 at least in this Union Budget 2024,” says Vivek Jalan, Partner, Tax Connect Advisory.
Whatever be the case, there is no denying the fact that there is a solid case for the raise in the standard deduction limit, and it is hoped that Finance Minister Nirmala Sitharaman will pay heed to this genuine demand of the salaried class sooner or later.