Financial experts and tax analysts are advocating for an increase in the standard deduction available under India's new income tax regime. This push comes amidst ongoing discussions surrounding future fiscal policies and Union Budgets, with proponents arguing that a higher deduction is crucial to make the simplified tax structure more attractive and equitable for salaried individuals. The current standard deduction of ₹50,000, introduced in the new regime in 2023, is deemed insufficient by many to address contemporary economic realities.

The call for an increased standard deduction primarily stems from several key considerations, including inflation, the need for parity with the old tax regime, and enhancing the new regime's appeal. The new income tax regime, introduced to offer lower tax rates without most exemptions and deductions, initially lacked the standard deduction entirely. It was later incorporated for salaried individuals and pensioners in the Union Budget 2023, aligning it with the amount available under the traditional, exemption-laden tax regime.

Arguments for an upward revision of the standard deduction include:

  • Impact of Inflation: Experts highlight that the current ₹50,000 standard deduction, while a welcome addition to the new regime, has been significantly eroded by inflation over time. This reduces its real value and effectiveness in providing tax relief to salaried taxpayers, whose purchasing power diminishes with rising costs of living.
  • Parity with Old Regime's Benefits: While the new regime aims for simplicity, the old regime offers numerous deductions and exemptions (e.g., Section 80C, HRA, LTA). A more substantial standard deduction in the new regime could partially compensate for the absence of these extensive benefits, potentially balancing the choice for taxpayers who currently find the old regime more beneficial due to higher savings.
  • Encouraging Adoption of New Regime: A key objective of introducing the new tax regime was to simplify compliance and encourage more taxpayers to opt for a cleaner tax structure. However, many salaried individuals continue to choose the old regime because the aggregate tax savings from various deductions often outweigh the lower slab rates of the new regime. A higher standard deduction could serve as a significant incentive, driving wider adoption of the new framework.
  • Support for Middle-Income Earners: Salaried individuals, particularly those in the middle-income bracket, would directly benefit from an increased standard deduction. It would enhance their disposable income and provide a more meaningful tax benefit without the complexities of managing numerous investment-linked deductions.

Currently, under both the old and new income tax regimes, salaried individuals and pensioners are eligible for a standard deduction of ₹50,000. For family pensioners, the deduction is set at ₹15,000 or one-third of the pension, whichever is less. The new regime, since April 1, 2023, has become the default tax option, though taxpayers retain the choice to switch to the old regime.

The Finance Ministry and policymakers are expected to consider these recommendations as they deliberate on upcoming Union Budgets and potential amendments to tax laws. The ongoing discussions underscore a broader effort to refine India's direct tax policies, aiming for a balance between simplification, revenue generation, and taxpayer welfare. The ultimate decision on hiking the standard deduction will hinge on economic projections, fiscal space, and the government's broader policy objectives.