As the Union Budget 2025 approaches, taxpayers across the country are eagerly awaiting the announcement from Finance Minister Nirmala Sitharaman. With just two days left before the Budget is presented, speculation is high about possible measures aimed at improving the New Tax Regime, particularly regarding the standard deduction.
The standard deduction has proven to be an essential provision for salaried individuals, allowing them to reduce their taxable income without needing to furnish additional documentation. In the upcoming Budget, it is expected that the government will take steps to further enhance the benefits under the new tax regime, especially for middle-class taxpayers.
Background: What is Standard Deduction?
The standard deduction is a fixed amount that salaried individuals can subtract from their taxable income, reducing the total amount of income that is subject to taxation. This deduction helps lower the financial burden on taxpayers by providing automatic relief, making it one of the most straightforward tax benefits available.
In 2018, the government reintroduced the standard deduction after it had been absent for several years, allowing salaried taxpayers to claim a flat deduction of Rs 40,000, which was later increased to Rs 50,000. For those in the new income tax regime, the standard deduction was further increased to Rs 75,000 in Budget 2024, from Rs 50,000. However, the standard deduction under the old tax regime has remained unchanged at Rs 50,000.
The Growing Call for a Higher Standard Deduction
As the new financial year nears and Budget 2025 takes shape, tax experts and taxpayers alike are calling for an increase in the standard deduction. The argument for this increase is fueled by various economic factors, including rising inflation and the limited tax exemptions available under the new tax regime.
Current State of the New Tax Regime
The New Tax Regime, which was introduced in FY 2020-21, has garnered significant support from taxpayers due to its simplified income tax slabs. It has proven especially beneficial for individuals who do not have many exemptions or deductions to claim under the traditional tax system. With tax slabs more favorable and the inclusion of standard deduction and National Pension Scheme (NPS) benefits, the new regime has been more appealing to many taxpayers.
Despite these improvements, the new tax regime has come under scrutiny for offering fewer exemptions and deductions compared to the old tax regime. This lack of deductions makes the standard deduction a vital part of the regime’s appeal.
Experts Weigh In: Should Standard Deduction Be Increased?
Many experts believe that raising the standard deduction could be the key to making the new income tax regime even more attractive. Sudhakar Sethuraman, Partner at Deloitte India, emphasized that the current Rs 75,000 deduction is insufficient in light of the rising cost of living and inflationary pressures. He also suggested that the government consider linking the standard deduction to a percentage of income, similar to the 30% standard deduction applied to rental income.
Inflation and Living Costs: The Case for Rs 1 Lakh Deduction
One of the main reasons behind the push for an increased standard deduction is the rising inflation, which has significantly impacted the cost of living in India. According to Vivek Jalan, Partner at Tax Connect Advisory Services LLP, the current Rs 75,000 standard deduction is inadequate given the financial pressures many taxpayers are facing. He believes that a higher deduction, such as Rs 1 lakh, would provide more relief to salaried individuals and could help ease their financial burdens.
Aakash Uppal, Partner and Leader (North & East) of Corporate Tax at BDO India, also noted that there is speculation about adjustments to the tax slabs in the upcoming Budget. Alongside these changes, an increase in the standard deduction would provide taxpayers with immediate relief, especially in an inflationary environment.
The Impact of Raising Standard Deduction on Taxpayers
Raising the standard deduction would offer significant benefits to taxpayers in the middle and lower income brackets, who are often most affected by the rising cost of living. By reducing the amount of income subject to tax, this increase could directly impact taxpayers’ take-home pay, allowing them to retain a larger portion of their earnings.
Sundeep Agarwal, Partner at Vialto Partners, pointed out that an increase in the standard deduction could make the new tax regime even more attractive to individuals who do not avail of other exemptions and deductions. With no deductions available for items such as house rent, medical insurance, and education, the standard deduction becomes a crucial tool for reducing taxable income and offering taxpayers some much-needed financial relief.
The Political and Economic Context
The political landscape in India plays an important role in shaping the Union Budget. As the 2024 General Elections have recently concluded, the government is likely to prioritize measures that benefit the middle class, which is a significant voter base. Increasing the standard deduction could be one of the ways to address the financial challenges faced by this demographic, while also enhancing the appeal of the new tax regime.
Additionally, with global economic challenges and domestic inflationary pressures, the government’s focus on providing fiscal relief to taxpayers is expected to remain strong. Raising the standard deduction would send a positive signal to salaried individuals and taxpayers across the country, particularly as the economy continues to recover from post-pandemic challenges.
A Look Ahead: Possible Outcomes in Budget 2025
As Budget 2025 draws closer, there is a growing sense of optimism among taxpayers who are hoping for an increase in the standard deduction. Tax experts have highlighted that such an increase could have a far-reaching impact, not just for salaried individuals, but also for the overall appeal of the new income tax regime.
The government’s focus on enhancing the new tax regime’s attractiveness, especially through changes like the standard deduction, is expected to boost its adoption rate. In turn, this could bring more people into the formal tax system, generating greater tax revenue for the government.
Table: Proposed Specifications for Standard Deduction Increase
| Aspect | Current (2024) | Proposed (2025) |
| Standard Deduction | Rs 75,000 | Rs 1,00,000 |
| Eligibility | Salaried & Retired Individuals | Salaried & Retired Individuals |
| Non-Eligibility | Self-Employed Individuals, HUF | Self-Employed Individuals, HUF |
| Impact | Reduced Taxable Income | More Relief for Middle-Class Taxpayers |
| Economic Context | Inflationary Pressures | Economic Recovery, Inflation |
| Government Goal | Simplification of Taxation | Attract More Taxpayers to New Regime |
Conclusion
As Budget 2025 approaches, the call for increasing the standard deduction is gaining momentum. Tax experts, as well as taxpayers, are hopeful that Finance Minister Nirmala Sitharaman will heed these concerns and provide the much-needed financial relief to the middle class by enhancing the standard deduction. With inflation and rising living costs taking a toll on many, this move could significantly ease the tax burden and make the new income tax regime more attractive and accessible to a wider section of the population.
The government’s decision on this matter could prove to be a crucial factor in shaping the economic landscape for the coming years, and it is a move that would undoubtedly resonate with taxpayers across India.
