Budget 2025: Why FM Nirmala Sitharaman should aim at increasing standard deduction again this time?

As the Union Budget presentation on February 1, 2025 approaches with just two days left, there is a high level of anticipation surrounding FM Nirmala Sitharaman's expected measures to bolster the New Tax Regime. The new income tax regime, implemented in FY 2020-21, has gained popularity among taxpayers due to its more favorable income tax slabs and rates. The inclusion of standard deduction and benefits for NPS has further enhanced its appeal.

The standard deduction is a fixed deduction available to salaried individuals that aids in reducing their taxable income. This deduction allows taxpayers to lower their income without the need for additional documentation or disclosures. The provision for standard deduction was reinstated in the 2018 budget announcement after being absent for several years.

Salaried individuals and retired taxpayers are entitled to claim standard deduction when filing their Income Tax Returns (ITR), regardless of their income. Self-employed individuals and Hindu Undivided Families (HUF) do not qualify for standard deduction.

Overall, the Union Budget 2025 is anticipated to bring relief to middle-class taxpayers through enhancements to the New Tax Regime, under the guidance of FM Nirmala Sitharaman.

In Budget 2024, Finance Minister Sitharaman announced an increase of Rs 25,000 in standard deduction from Rs 50,000 to Rs 75,000 under the new income tax regime. The standard deduction remains unchanged at Rs 50,000 under the old income tax regime. As the new income tax regime is now the default option and the government is encouraging its adoption, taxpayers are eagerly awaiting further updates from Finance Minister Sitharaman regarding a potential increase in the standard deduction limit.

According to tax experts, with limited exemptions and deductions available under the new income tax regime, there is a compelling argument to raise the standard deduction in order to incentivize more taxpayers to switch over. One expert even suggests considering the standard deduction as a fixed percentage of income.

Sudhakar Sethuraman, Partner at Deloitte India, recommended that the government could also explore the option of providing a standard deduction as a fixed percentage of income, akin to the 30% standard deduction on rental income.

“In the present-day inflationary conditions, the current Rs 75,000 standard deduction is too low. Salaried taxpayers are hoping the government will increase it to Rs 1 lakh in the new tax regime,” said Vivek Jalan, Partner at Tax Connect Advisory Services LLP.

Aakash Uppal, Partner & Leader (North & East), Corporate Tax at BDO India, said: "The government is expected to further enhance the new tax regime by adjusting tax slabs and raising the standard deduction. There’s also speculation about a sunset clause for the old regime, which could eventually phase it out."

Sundeep Agarwal, Partner, Vialto Partners, said: “With rising living costs, the standard deduction under the new tax regime should be increased from Rs 75,000 to Rs 1,00,000.  This hike would make the new income tax regime more attractive, considering no other deductions/exemptions are allowed.” 

Surabhi Marwah, Tax Partner at EY India, suggested that enhancing the standard deduction could enhance the appeal of the new tax regime, as there are limited deductions or exemptions available. This adjustment has the potential to decrease taxable income, offering significant relief, especially for individuals in lower to middle-income categories.