The Interim Budget 2024 is just around the corner and the middle-class taxpayers are holding their breath, hopeful for some relief in the form of income tax concessions.
If Finance Minister Nirmala Sitharaman proposes it in the interim budget 2024 scheduled for February 1, ahead of the general elections, it would provide a much-needed boost to the wallets of salaried individuals.
Amongst the key expectations is a potential increase in the standard deduction limit from the current Rs 50,000. But is there a case for an increase in the standard deduction limit?
A report from Anand Rathi talks about how a higher standard deduction is needed for salaried taxpayers to ease taxes for middle and lower-income groups without many investment options.
Understanding standard deduction
The concept of standard deduction was first introduced in India in 1974. In 2018, as part of broader tax reforms, it was reinstated to replace tax benefits for transport allowance and reimbursement of medical expenses.
The standard deduction is a fixed deduction that salaried individuals can claim against their taxable salary income, without the trouble of furnishing proof of actual expenses or investments made.
Stagnation since 2019
It has been nearly five years since the standard deduction underwent a revision, with the last adjustment taking place in 2019.
In the interim budget of February 2019, the standard deduction limit was set at Rs 50,000, but it was restricted to the old tax regime. A subsequent move in Budget 2023 extended this benefit to taxpayers opting for the new income tax regime as well.
The case for an increase: Why Rs 50,000 may not be enough?
Several reasons underscore the need for a revision in the standard deduction limit:
1. Rising inflation: With inflation on the upswing since 2019, the current standard deduction seems inadequate to meet the escalating living costs for salaried individuals.
“Periodical revision of Standard Deduction is required to account for the rising cost of living expenses incurred by the salaried class,” an Anand Rathi Advisors Limited report said.
2. Equity in tax benefits: Increasing the standard deduction aligns the tax benefits for job earners with those deriving income from business or profession, who can claim deductions for related expenses.
3. Work-from-home dynamics: The lasting impact of the Covid-19 pandemic has made remote work a permanent fixture for many. Increased spending on home office infrastructure calls for a higher standard deduction to offset these expenses.
“Increasing the standard deduction would compensate employees for increased electricity cost, food expenses, infrastructure cost etc,” the report mentioned.
4. Increase in indirect taxes: Raising standard deductions will help people who earn a salary spend more on things, indirectly boosting the government’s GST revenue.
“An increase in standard deductions will lead to a greater ability of the salaried class to spend on items which will indirectly increase the GST revenue for the government,” the report explained.
5. Massive surge in medical bills: The tax advantage for getting money back on medical expenses was taken away with the introduction of the standard deduction. And since medical costs are going up, the limit for the standard deduction should too.
“The tax benefit on reimbursement of medical expenses was withdrawn with the introduction of standard deduction. Rising medical costs, the standard deduction limit should also be enhanced,” it said.
Further, a higher standard deduction can incentivise more taxpayers to embrace the new income tax system, streamlining the process and making it more attractive.
A boosted standard deduction injects spending power into the hands of taxpayers, especially those with fixed incomes like pensions. This can bolster economic growth by supporting consumer spending.