Income Tax: Increase in Standard Deduction to Rs 1 Lakh for Salaried

This year’s Budget session is about to begin, and the salaried class in India is looking forward to many of the changes that will impact their personal lives. According to reports, the government is considering increasing the standard deduction limit for salaried employees and pensioners by 30 to 35 percent during the upcoming budget session. If implemented, the move will be in response to calls from industry groups such as FICCI, Assocham, and CII. Officials were quoted in a report as saying that the income tax slabs would remain unchanged.

In lieu of reimbursement of medical expenses and transportation allowance, the Finance Act of 2018 introduced a standard deduction from salary income up to Rs 40,000. The benefit of the additional deduction of Rs 5,800 is also reduced due to the increase in the cess rate from 3% to 4%. The Finance Act, 2019 increased the standard deduction to Rs. 50,000. Standard deductions, on the other hand, will not be available to those who opt for the new tax regime.

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Apart from profession tax on employment, for the expenses which employees cannot claim as a deduction, the government provides a standard deduction to salaried employees to cover expenses incurred during employment. “The standard deduction for salaried employees should be reinstated to at least Rs. 100,000 to ease the tax burden of the employees and keeping in mind the rate of inflation and purchasing power of the salaried individual, which is dependent on salary available for disbursement. Also, particularly on ground of increasing trend of ‘Work from Home’ culture during COVID-19 pandemic period where employee incurs higher work related personal expenditure (like higher electricity, air conditioning, food, etc.),” Industry body FICCI has said in its memorandum.

It has been stated that the exemption for reimbursement of medical expenses and transportation allowance should be maintained in addition to the standard deduction. The government is now said to be contemplating the industry organisations’ recommendations, according to the reports.

“There are many suggestions on personal taxation. This year one common demand was to enhance the limit of standard deduction, especially considering inflated cost of medical expenses on account of Covid-19,” a senior government official told.

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Expert’s view on Increasing Standard Deduction

“ Given that the inflation-related risks are likely to shape the monetary policy of the central bank, an increase in US federal bank rates will accentuate the cash outflow from markets and that the period of statutory concessions extended to both buyers, developers and other stakeholders in the market will lapse, the immediate focus will be on how to ensure any resultant shock will be cushioned through fiscal measures thereby providing more cash in hand for all stakeholders. This should be led by extending the tax concessionary benefits pertaining to affordable housing, increasing tax set-off for housing loan interest payment under sections 24, 80EE and specifically increasing the standard deduction which could increase the cash available through savings for taxpayers”, said an expert professional.

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“Standard deduction from salary can be claimed by all salaried employees irrespective of category and need of any investment. Standard deduction from salary was taken down for a number of years and was re-introduced by Budget 2018, which provided for a standard deduction of Rs. 40,000 from salary income. Simultaneously, the deductions in respect of transport allowance of Rs. 19,200 and medical reimbursement of Rs. 15,000 were withdrawn, thus providing minor benefit only,” said another expert. “Standard deduction was raised to Rs. 50,000 from Financial Year 2019-20. Considering the inflation and increase in the cost of living during last 2 years, government should take a step forward to increase the standard deduction so that middle class salaried employees can have some sigh of relief, specially when deductions of Rs. 34,200 have already been withdrawn in guise of standard deduction,” expert added.