Will Sitharaman increase standard deduction limit to ₹1L ?

With the beginning of July, the countdown for Union Budget 2024 has also begun. The full-fledged Budget for FY 2024-25 may arrive towards the end of July. There is anticipation in the market as this is going to be the first budget of Modi 3.0 government. Following the results of the Lok Sabha elections and the formation of the NDA government, speculation is rife that there might be relief in income tax to appease voters. One potential avenue for relief is an increase in the limit of the standard deduction in Budget 2024.

Increased standard deduction in new regime?

According to a report by CNBC, the Finance Ministry is considering increasing the limit of the standard deduction in the new tax regime. As per the report, this could be a part of Budget 2024, post discussions between the Prime Minister’s Office and various government departments.

Another report suggests that Ernst & Young, a tax consultancy firm, has recommended doubling the limit of the standard deduction to Rs. 1 lakh in the new tax regime. Currently, the standard deduction is Rs. 50,000 under the current regime.

The standard deduction is a fixed amount deducted from the taxpayer’s taxable income. This reduces tax liability without requiring any proof from the taxpayer. Usually, salary earners and pensioners can claim standard deduction.

In the Budget for the financial year 2023-24, Finance Minister Nirmala Sitharaman made several changes to make the new tax regime more attractive, including making the standard deduction a part of it, providing a deduction of Rs. 50,000 for salary individuals and pensioners. Although, this was previously limited to the old tax regime.

Govt aiming at increased spending?

Experts believe that in the current economic conditions where inflation is high, the limit of Rs. 50,000 for the standard deduction is not sufficient. Hence, there are suggestions that the government might consider increasing the limit of the standard deduction to Rs. 1 lakh in Budget 2024, aligning it with current expenses and inflation rates.

If the NDA government increases the limit of the standard deduction in Union Budget 2024, it will increase the disposable income of salaried individuals, in turn leading to an increase in spending which will accelerate economic activities.

There is no hope of an increase in the limit of the standard deduction in the old tax regime through exemptions and deductions. In fact, the government is gradually moving away from the old tax system with more exemptions. It wants to adopt a new tax system with lower tax rates. Precisely why, the government might take some steps in Budget 2024 to make the new tax regime more attractive.