Budget Expectations: Will Standard Deduction see a revision in Interim Budget? Here's what experts feel

Budget expectation income tax: February 1 will see Union Finance Minister Nirmala Sitharaman present the Interim Budget statement for this year ahead of the Lok Sabha elections scheduled in April-May. The Interim Budget is expected to have limitations as the full Budget will be presented in July by the newly elected government. However, experts feel there could be certain announcements, such as an increase in the Standard Deduction limit. 

Standard Deduction is the flat deduction of Rs 50,000 from your income that is taxable under the head salaries. In 2018, former Finance Minister Arun Jaitley introduced the Standard Deduction of Rs 40,000 in Budget that year, which practically replaced the transport allowance of Rs 19,200 and medical reimbursement of Rs 15,000 per annum. 

Later, interim finance minister Piyush Goyal raised the standard deduction for salaried taxpayers from Rs 40,000 to Rs 50,000 in 2019, which was the Interim Budget in the first term of Narendra Modi-led government.

In Budget 2023, FM Sitharaman extended the standard deduction of Rs 50,000 to the new tax regime, which was earlier restricted to the Old Tax Regime, making it more attractive for taxpayers.

Increase in Standard Deduction

Many experts feel that the standard deduction should be raised as it has been almost five years since standard deduction was revised. A hike in the standard deduction would offer tax relief to individuals in the middle and lower-income brackets who may not have access to different tax-saving investments and deductions. This would help alleviate the tax burden on these segments of the population.

"By increasing the standard deduction, the government can provide much-needed relief to taxpayers. Looking at the current economic landscape in India, we strongly believe that an increase in the standard deduction is imperative to alleviate the financial strain imposed by the rising cost of living. The steady inflation and other economic factors have significantly elevated our day-to-day expenses, making it challenging for many of us to make ends meet," said Samir Bahl, CEO – Investment Banking, Anand Rathi Advisors.

With inflation increasing since 2019, the current standard deduction appears insufficient to cover the rising living expenses for individuals who receive a salary. A report by Anand Rathi Advisors Limited report noted that periodical revision of Standard Deduction is required to account for the rising cost of living expenses incurred by the salaried class.

"It has been almost five years since the standard deduction was revised. To bring parity with the businessmen and professionals, it is expected that the salaried individuals be provided a standard deduction for their official expenses of an amount of at least Rs 1,00,000 in 2024," Rahul Charkha, partner at Economic Laws Practice. 

Deepashree Shetty, Partner, Tax & Regulatory Services, BDO India, said: "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."

Akhil Chandna, Partner, Grant Thornton Bharat, told ET that the standard deduction increase can help offset the rising cost of living. Therefore, increasing the quantum of standard deduction is required to keep pace with the inflation over the last five years.

“Standard deduction has remained largely stagnant from FY 2004-05 to FY 2022-23 leading to minimal savings in taxable income for salaried individuals. An increase in standard deductions will lead to increased spending and consumption which will indirectly increase GST revenue for the government. In our humble opinion, we propose that standard deduction should be considered as a percentage of total income from salary,” said Atul Thakkar, Director – Investment Banking, Anand Rathi Advisors.

Besides, the Anand Rathi Advisors report noted that increasing the Standard Deduction brings tax benefits in line for individuals who earn income from a job and those who derive income from a business or profession. This allows both groups to claim deductions for their relevant expenses. 

Announcements in Interim Budget

The Centre cannot bring in major changes in the taxation system due to the election year. Article 116 of the Indian Constitution states a vote on account is an advance grant to the government from the Consolidated Fund of India to cover short-term expenditure requirements until the new financial year begins.  Even FM Sitharaman had said that the upcoming interim Budget will be solely a 'Vote-on-Account' due to impending general elections. 

An E&Y report stated: "The Election Commission Model Code of Conduct places constraints on the ruling party in power, barring them from announcing tax sops that could sway voters. This tradition aligns with the practice of refraining from major changes before the general elections."

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