With the Budget around the corner, there are many expectations and speculations regarding the benefits the Finance Minister may announce for taxpayers. One such anticipated benefit is an increase in the standard deduction limit. Standard deduction of Rs 40,000 per year for salaried individuals was reintroduced in Budget 2018, replacing two earlier deductions—travel allowance (Rs 19,200) and medical deduction (Rs 15,000) per annum. In the interim budget of 2019, the standard deduction limit was increased to Rs 50,000. However, there has been continuous demand to increase this limit, as the combined total of the replaced deductions was Rs 34,200. Consequently, the current limit of Rs 50,000 offers only marginal additional savings to tax payers. Experts believe that in the upcoming budget the Finance Minister may consider increasing standard deduction to up to Rs 1 lakh per annum.
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What is Standard Deduction?
The standard deduction is a flat deduction available to individuals earning salary. Employees do not need to submit any proof or documents to the employer or IT Department to claim this deduction. A standard deduction of up to Rs 50,000 per year is allowed when computing income chargeable under the head "salaries." This deduction is available to all employees, whether in the private or government sector, regardless of the amount of salary. Until FY 2022-23, the standard deduction was available only under the old regime. However, starting from FY 2023-24, salaried taxpayers are also eligible for a standard deduction of Rs 50,000 under the new tax regime.
Standard deduction is also available in case of income from pension, provided that the pension received is chargeable under the head "Income from Salaries" and not under "Income from Other Sources."
In other words, the pension received by an individual after retirement is chargeable under the head "Income from Salaries," and the standard deduction is allowed in this case. However, if the pension is received by the individual's dependents after their death, it is considered family pension and is chargeable under the head "Income from Other Sources" in the hands of the recipients. In this case, the standard deduction is not allowed.
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The standard deduction can be increased 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 make the standard deduction more beneficial and help taxpayers save a significant amount, the limit should be increased, allowing taxpayers to have a higher disposable income. “To boost disposable income in the hands of taxpayers, government may increase the standard deduction amount from Rs 50,000 to Rs 1 Lakh,” said Amarpal S. Chadha, Tax Partner and Mobility Leader, EY India
Other experts echo this sentiment and believe that the government will certainly consider increasing the standard deduction limit.
“There is a possibility that the government may increase the standard deduction. Currently, with a significant increase in inflation and the standard deduction remaining fixed at Rs 50,000 from an extended period, individuals are anticipating an increase in the standard deduction to Rs 1,00,000, which would provide some relief to the taxpayers,” said Akhil Chandna, Partner, Grant Thornton Bharat.
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Some experts believe that increasing the standard deduction limit is necessary to ensure salaried individuals are on par with business individuals.
“The salaried taxpayers are eligible to claim a standard deduction of Rs 50,000 irrespective of actual expenses incurred by them unlike individuals having income from business and profession who are eligible to claim deduction for business-related expenses,” said Chander Talreja, partner, Vialto Partners. Conservatively, Talreja believes that the standard deduction limit may be increased by Rs 25,000 which will help to create some parity in tax benefits between salaried individuals and those having income from business or profession.
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