It has been almost 5 years since standard deduction was revised; the previous instance was in 2019. Though 2024 will see only an interim budget, middle-class taxpayers are eagerly hoping Finance Minister Nirmala Sitharaman will roll out some tax sops. Will the Budget 2024 raise standard deduction from Rs 50,000? This is what experts are saying:
Income Tax in Budget 2024: All about standard deduction
Standard deduction is a flat deduction salaried individuals can claim against taxable salary income without requiring any proof of actual expense incurred. It aims to achieve parity between taxpayers who receive income through salary and those who receive income from business. Standard deduction is available under the old income tax regime and the new income tax regime.
The concept of standard deduction was first introduced in India in 1974. Sharing a brief on the history of standard deduction, Adhil Shetty, CEO of BankBazaar.com, says, “This deduction was available to salaried individuals and pensioners to offset some of their expenses related to employment. It was removed in 2004-2005 as part of the tax simplification measures. Then, it was reintroduced again in the Union Budget in 2018 and set at Rs 40,000 for salaried employees and pensioners.” Budget 2018 reinstated the deduction while withdrawing tax benefits for transport allowance and reimbursement of medical expenses. The goal was to reduce the compliance burden and paperwork of employers, while providing some relief to taxpayers. The interim budget presented on February 1, 2019, raised the limit 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 standard deduction be increased from Rs 50,000 in Budget 2024?
There are many compelling reasons to raise the limit of the standard deduction from Rs 50,000. EY mentions in its Point of View on Budget 2024 that the threshold of standard deduction should be increased from Rs 50,000 to Rs 1 lakh. Several experts say there is a need to raise standard deduction now because of inflation and Covid impacts as well as to bring parity with business-income earners.
1) Rising inflation: Standard deduction was last revised in 2019. Given the rising inflation and the increased living expenses of salaried individuals now, the deduction of Rs 50,000 is a bit low, says CA Ritika Nayyar, Partner, Singhania & Co.
Deepashree Shetty, Partner, Tax & Regulatory Services, BDO India, says, “Since 2019, the average inflation rate in India has increased from 3.73% to 5.51%. An increase in standard deduction of at least 30% — i.e., up to Rs 65,000 — will be appropriate.”
Standard deduction, needs to be periodically adjusted to account for inflation, says Akhil Chandna, Partner, Grant Thornton Bharat. “There is a genuine case for increasing the quantum of standard deduction to keep pace with the inflation over the last five years. The standard deduction increase can help offset the rising cost of living. As prices for essential goods and services increase, individuals may require additional income to maintain their standard of living.”
2) Parity with taxpayers who receive professional/business income: Individuals earning income from business or profession are entitled to reduce their tax liability for expenses incurred to earn the professional/business income. However, salaried taxpayers are not eligible to claim similar deductions for the expenses incurred to earn their salary income. So a standard deduction is given to cover such expenses. “Raising standard deduction will help bring parity between individuals earning income from salary and professional/business income,” Chandna adds.
3) Pandemic fallout: The Covid-19 outbreak and its disruptions have significantly changed the way of working for many salaried individuals. Work-from-home model has become a permanent fixture in several organisations, even though it may be only for a part of the week. This has led to such taxpayers having to pay more for infrastructure and other factors. “There is no tax break for the expenses employees have to incur to work from home, such as using a portion of the house for working, buying quality earphones, setting up other IT/communication infrastructure, etc. Therefore, raising standard deduction to Rs 75,000 merits consideration,” says Kuldip Kumar, Partner, Mainstay Tax Advisors LLP. “Even applying the raise in the cost inflation index from 2019-20 (from 289 to 348), the number works out to be Rs 60,200.”
Hike in standard deduction: 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
Hike in standard deduction in Budget 2024 can make new income tax regime more attractive
Most deductions and exemptions are not allowed in the new tax regime. Hence, standard deduction should be higher, argues Deepashree Shetty.
Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, says as the government wants to make the new income tax regime the default one, a higher standard deduction can catalyse wider adoption of the regime, “given that such deduction is probably the only claimable deduction for most taxpayers under the new regime.”
Hike in standard deduction limit in Budget 2024: A boon for lower and middle income salaried taxpayers
As the cost of living rises due to inflation, an increased standard deduction can help safeguard the purchasing power of individuals, particularly those on fixed incomes, like pensions . “A higher standard deduction promotes greater equity in the tax system by providing more significant tax relief, particularly for lower and middle-income groups. 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,” adds Adhil Shetty.