Union Budget expectations: Since the Budget presentation date was announced, taxpayers and sector experts have been predicting what all changes Finance Minister Nirmala Sitharaman can bring to revitalise the economy and alleviate the financial burden on individuals. Many experts have predicted that the FM can tweak the basic exemption limit and the standard deduction that would benefit both the tax regimes. These elements are reportedly under ministry’s evaluation for potential significant revisions, which could offer substantial relief to taxpayers.
The 2018 Budget reintroduced the standard deduction of Rs 40,000 per year for salaried individuals. This standard deduction replaced the previous deductions for travel allowance (Rs 19,200) and medical deduction (Rs 15,000) annually. Subsequently, in the interim budget of 2019, the standard deduction limit was raised to Rs 50,000 per year.
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It should be noted that due to the total of the replaced deductions amounting to Rs 34,200, there has been persistent requests for an increase in the standard deduction limit. As a result, the current threshold of Rs 50,000 provides minimal added tax savings for individuals. Analysts speculate that in the forthcoming budget, the Finance Minister might deliberate on elevating the standard deduction to potentially reach Rs 1 lakh annually.
Why standard deduction is crucial
The standard deduction can be claimed by individuals receiving a salary or pension, excluding business owners. The new tax regime, which was adopted as the default tax system in April 2023, discontinues almost all common deductions available to individuals, such as those outlined in Section 80C under the Old Tax Regime, which permit deductions of up to Rs 1.5 lakh for investments in specified assets, or deductions for medical insurance premiums. Opting for the new tax regime means forgoing these deductions irrespective of any investments made by the individual.
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Notably, the standard deduction stands out as it remains applicable under both the old and new tax structures. As an example, if one previously claimed a Rs 50,000 deduction from their salary under the former system but transitions to the new system for lower taxes, they can continue to claim the standard deduction. This flexibility offers a notable advantage, solidifying the standard deduction’s unique position in the tax landscape.
The standard deduction is a crucial provision for salaried taxpayers, providing them with the opportunity to decrease their taxable income by a set amount without the requirement of itemizing deductions. This simplification of the tax filing process not only eases the taxpayer’s burden but also frequently leads to a reduction in their tax liability.
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CA Suresh Surana says, “Standard deduction is provided to cover expenses incurred during employment, excluding professional tax. It is pertinent to note that several expenses incurred by employees during the course of their jobs are not deductible under current provisions. Additionally, the exemptions available to the salaried u/s 10 are capped at outdated limits that fail to account for inflation, rendering them ineffective. Thus, in order to address this, it is expected that such a standard deduction limit be increased to Rs 60,000 in Budget 2024 and should be adjusted annually in line with the Cost Inflation Index (CII).”
Basic exemption limit
It is expected that the basic exemption limit will be increased for both tax regimes, which are currently set at Rs 3 lakh and Rs 2.5 lakh, respectively. The basic exemption limits are income thresholds below which no tax is payable. Under the old tax regime, the limit is Rs 2.5 lakh, and under the new tax regime, it is Rs 3 lakh. There is an expectation that the limit under the new tax regime will be raised to Rs 5 lakh.
The different exemption limits have caused confusion among taxpayers. To simplify matters, it is recommended that the basic exemption limit should be uniformly increased to Rs 5 lakhs under both tax regimes. This adjustment aims to lessen the compliance burden on taxpayers and provide them with more financial flexibility. The new tax regime, which will become the default regime from April 1, 2023, has become popular among taxpayers due to its added advantages for various income groups.
“The basic exemption limits are income thresholds below which no tax is payable. Under the old tax regime, the limit is Rs 2.5 lakh, and under the new tax regime, it is Rs 3 lakh. There is an expectation that the limit under the new tax regime will be raised to Rs 5 lakh,” CA Surana added.
