As the Budget approaches, there is much anticipation and speculation about the potential benefits that the Finance Minister might announce for taxpayers. One highly awaited benefit is a possible increase in the standard deduction limit. The standard deduction for salaried individuals was reintroduced at Rs 40,000 per year in Budget 2018, replacing two previous deductions of travel allowance (Rs 19,200) and medical deduction (Rs 15,000) annually. In the interim budget of 2019, the standard deduction limit was raised to Rs 50,000. However, there has been a persistent demand to further raise this limit, as the combined total of the replaced deductions was Rs 34,200. Consequently, the current limit of Rs 50,000 offers only minimal additional savings to taxpayers. Experts speculate that in the upcoming budget, the Finance Minister might consider increasing the standard deduction to up to Rs 1 lakh per annum.
Definition of Standard Deduction:
The standard deduction is a fixed deduction available to salaried individuals. Employees are not required to provide any proof or documentation to their employer or the IT Department to claim this deduction. A standard deduction of up to Rs 50,000 per year is permitted when calculating income under the "salaries" category. This deduction is accessible to all employees, whether in the private or public sector, regardless of their salary amount. Until FY 2022-23, the standard deduction was applicable only under the old tax regime. However, starting from FY 2023-24, salaried taxpayers are also entitled to a standard deduction of Rs 50,000 under the new tax regime.
The standard deduction is also applicable for pension income, provided that the pension falls under the "Income from Salaries" category and not under "Income from Other Sources."
Simply put, the pension received by an individual post-retirement falls under the "Income from Salaries" category, allowing for the standard deduction. However, if the pension is received by the dependents of the individual after their demise, it is considered family pension and falls under the "Income from Other Sources" category for the recipients, thus not qualifying for the standard deduction.
Potential Increase in Standard Deduction to Rs 1 Lakh per Annum:
The standard deduction was introduced by eliminating two existing deductions totaling Rs 34,200, resulting in a minimal effective additional deduction. To enhance the benefits of the standard deduction and assist taxpayers in saving a substantial amount, the limit should be raised to provide taxpayers with a higher disposable income. “To enhance the disposable income of taxpayers, the government may consider raising the standard deduction from Rs 50,000 to Rs 1 Lakh,”
Other experts share this view and anticipate that the government will indeed deliberate on increasing the standard deduction limit.
“There is a likelihood that the government will raise the standard deduction. With a notable rise in inflation and the standard deduction stagnant at Rs 50,000 for an extended period, individuals are expecting an increase in the standard deduction to Rs 1,00,000, offering some relief to taxpayers.
Some experts argue that increasing the standard deduction limit is essential to ensure that salaried individuals are on par with business individuals.
“Salaried taxpayers can claim a standard deduction of Rs 50,000 regardless of their actual expenses, unlike individuals with income from business and profession who can claim deductions for business-related expenses.