In a relief to taxpayers, finance minister Nirmala Sitharaman announced a hike in the standard deduction limit under the new tax regime to Rs 75,000 in the Union Budget 2024-25 on Tuesday. She also announced an increase in the standard deduction limit for family pensioners to Rs 25,000 from Rs 15,000.
Reiterating the government’s focus on simplifying tax structures and rules, the FM said more than two-third personal tax-payers have availed of the new tax regime in financial year 2023-24.
Currently, a standard deduction of Rs 50,000 is available under the new as well as the old tax regime. It is applicable to those who have a salary or pension income. Only these people can claim this deduction.
The income tax laws also allow a family pensioner having family pension to claim standard deduction under the old and new tax regimes. A family pensioner can claim only Rs 15,000 as standard deduction.
Annuity payments (pension) received from insurance companies are taxable under the ‘income from other sources’ category. Hence, they are not eligible for standard deduction. However, family pension taxable under the same head is eligible for standard deduction.
What is Standard Deduction?
The standard deduction is applicable for those individuals who earn a 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 was allowed (until now) when computing income chargeable under the head “salaries.”
This deduction is available to all employees in both private and government sectors, 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 can also be claimed 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’.
How to Claim Standard Deduction?
Standard deduction is a straight deduction available from salary and pension income. There is no need to submit any document to claim standard deduction. However, it is necessary to show receipt of salary/pension income.
What Does Increase in Standard Deduction Mean?
According to some experts, increase in the standard deduction limit is necessary to ensure salaried individuals are on par with business individuals.
A Moneycontrol report quoting Chander Talreja, partner, Vialto Partners, said 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”.
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.
History of Standard Deduction
Standard deduction was available to taxpayers till FY 2004-05 and was part of the Income-tax Act, 1961. At that time, a salaried individual could claim standard deduction of Rs 30,000 or 40% of the salary, whichever was lower. This was available for salaried individuals having annual income up to Rs 5 lakh. For those earning above Rs 5 lakh, standard deduction of Rs 20,000 was available. This deduction was withdrawn from FY 2005-06.
The Budget 2018 reinstated standard deduction in lieu of medical reimbursement and transport allowance which were removed. When it was re-introduced, standard deduction of Rs 40,000 was allowed to the salaried. However, in the interim budget 2019, the standard deduction amount was raised to Rs 50,000 — a hike of Rs 10,000.
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