Finance Ministry plans to increase standard deduction in income tax

According to the Times of India, the Finance Ministry is planning to increase the standard deduction limit on income for taxpayers under the new regime, while the old, exempted regime will be kept unchanged. This potential adjustment comes at a time when the third NDA government is gearing up for its first Union Budget.

Finance Minister Nirmala Sitharaman has begun public consultations on the budget, though most discussions are within the Finance Ministry itself. These internal assessments will be reviewed with other government branches and the Prime Minister’s Office before a final decision is taken.

In the 2023 Budget, the Finance Minister introduced a standard deduction of Rs 50,000 for salaried taxpayers and pensioners under the new regime, which became the default unless opted out. Additionally, the exemption under Section 87A was increased for taxable income up to Rs 7 lakh, eliminating taxes for those with these incomes. The highest surcharge was also removed under the new regime.

Individuals with taxable income above Rs 3 lakh pay 5 per cent income tax. Industry leaders have suggested adjusting the rates in higher brackets to boost consumption. Despite the potential revenue loss, the increased standard deduction will benefit all salaried taxpayers, including those with higher incomes.

The standard deduction was initially introduced at Rs 40,000 to help salaried individuals with medical and transport expenses, and was increased to Rs 50,000 in 2019. Given the current cost of living and inflation, this limit is considered inadequate, leading to hopes that it may be increased to a minimum of Rs 1 lakh.

While major changes to the capital gains mechanism are unlikely, the government may decide to maintain the status quo for the time being, with plans to align holding periods across all asset classes.