Income Tax in Budget 2024: One of the most popular deductions is the standard deduction, which salaried taxpayers can claim without having to make any investments. The standard deduction cap has long been called for to be raised. Following the inclusion of the standard deduction in the new income tax regime last year, the demand has grown louder.
The last time standard deduction was changed was in 2019, which is nearly five years ago. Middle-class taxpayers are hoping Finance Minister Nirmala Sitharaman will implement some tax breaks, even though 2024 will only see an interim budget. Will the standard deduction be increased from Rs 50,000 in the Budget 2024? Let’s what Experts are saying.
Budget 2024’s Income Tax: Everything about the standard deduction
The standard deduction is a fixed deduction that salaried individuals can deduct from their taxable salary income without having to provide evidence of their actual out-of-pocket expenses. It seeks to establish parity between taxpayers who receive business income and taxpayers who receive salary income. Both the previous and current income tax regimes allow for the standard deduction.
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In India, standard deduction was initially introduced in 1974. Adhil Shetty, CEO of BankBazaar.com, provides a brief overview of the standard deduction’s past, saying, “This deduction was available to salaried individuals and pensioners to offset some of their employment-related expenses. It was eliminated in 2004–2005 as a component of the efforts to simplify taxes. Then, in 2018, it was brought back and fixed at Rs 40,000 for pensioners and salaried workers in the Union Budget. In Budget 2018, the deduction was brought back, but tax benefits for transportation allowance and medical expense reimbursement were eliminated. Reducing employers’ paperwork and compliance burden was the aim, with some relief for taxpayers. On February 1, 2019, the interim budget was presented, and it increased the cap of standard deduction to Rs 50,000. However, it was limited to the old tax regime. To make the new income tax regime more attractive, Budget 2023 allowed standard deduction of Rs 50,000 to taxpayers opting for the new regime as well.”
Why should Budget 2024’s standard deduction be raised from Rs 50,000?
There are numerous strong arguments in favor of increasing the standard deduction cap from Rs 50,000. “It makes sense for the government to take into account raising the standard deduction limit from Rs 50,000 to Rs 1,00,000 annually,” states Sonu Iyer, EY India’s Tax Partner and Leader of People Advisory Services.
According to a number of experts, the standard deduction needs to be raised immediately in order to bring it into line with business income earners and account for the effects of COVID-19 and inflation.
1) Rising inflation: Standard deduction was last revised in 2019. According to CA Ritika Nayyar, Partner, Singhania & Co., the deduction of Rs 50,000 is a little low given the current rise in inflation and the increased living expenses of salaried individuals.
According to Deepashree Shetty, Partner, Tax & Regulatory Services, BDO India, “India’s average inflation rate has risen from 3.73% to 5.51% since 2019. It will be appropriate to raise the standard deduction by at least 30%, or up to Rs 65,000.”
In order to account for inflation, the standard deduction needs to be modified on a regular basis, according to Grant Thornton Bharat Partner Akhil Chandna, “There is a valid argument for raising the standard deduction amount in order to keep up with the inflation of the previous five years. The rising cost of living may be partially offset by the increase in the standard deduction. People may need additional income to maintain their standard of living when the cost of necessities rises.”
“This will be a pivotal move in safeguarding them from the brunt of increasing inflation rates and the subsequent jump in the cost of living and overall expenses,” says Nirav Choksi, CEO & Co-founder at CredAble.
2) Parity with taxpayers who receive professional/business income: People who are able to deduct the costs they incurred in order to earn their professional/business income from taxes. However, similar deductions for the costs incurred in order to earn salary income are not available to taxpayers who are salaried. Thus, a standard deduction is made to pay for these costs.Increasing the standard deduction will contribute to income parity amongst earners.
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3) The effects of the pandemic: For many salaried people, the Covid-19 outbreak and its disruptions have drastically altered their way of working. In many companies, the work-from-home model has become standard practice, albeit albeit for a limited portion of the workweek. As a result, these taxpayers now have to foot the bill for additional infrastructure and other expenses. “The costs that employees must pay to work from home, such as utilizing a portion of the house for work, purchasing qua.
Hike in standard deduction expected: How it will help taxpayers
| Situation
|
Standard deduction of Rs 50,000 |
If standard deduction is increased to Rs 75,000 |
If standard deduction is increased to Rs 1 lakh |
| Gross salary(Rs) | 10,00,000 | 10,00,000 | 10,00,000 |
| Less: Standard deduction (Rs) | 50,000 | 75,000 | 1,00,000 |
| Taxable salary (Rs) | 9,50,000 | 9,25,000 | 9,00,000 |
| Final tax liability (at current rates with cess) (Rs) | 1,06,600 | 1,01,400 | 96,200 |
Note: According to tax rates in the old income tax regime
Increase in the standard deduction in Budget 2024 may increase the appeal of the new income tax system
The majority of exemptions and deductions are prohibited under the new tax law. According to Deepashree Shetty, the standard deduction ought to be higher as a result.
A higher standard deduction could spur broader adoption of the new income tax regime, according to Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, “given that such deduction is probably the only claimable deduction for most taxpayers under the new regime,” as the government seeks to make the new tax regime the default one.
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Budget 2024’s increase in the standard deduction limit will benefit salaried taxpayers with lower and middle incomes
An higher standard deduction can protect people’s purchasing power, especially for those with fixed incomes like pensions, when inflation drives up the cost of living. In particular for lower- and middle-class groups, a higher standard deduction offers more substantial tax relief, which encourages greater equity in the tax system. A higher standard deduction can increase the disposable income of salaried employees and pensioners by reducing the net taxable income, which will support consumer spending and drive economic growth.
This increment shall serve as a good motivation and reward for the salaried individuals, who have been key contributors to the tax exchequer and generally perceived to be the most tax compliant of all taxpayers.
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