Budget 2024: Possibility of increase in Standard Deduction Under New Tax Regime

As the BJP government prepares its first budget for its third term, the finance ministry is considering raising the standard deduction limit for income taxpayers under the new regime. This change will not affect the old regime, which is rich in tax exemptions, maintaining the government's dual tax system.

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Budget Preparations and Economic Considerations

Finance Minister Nirmala Sitharaman is leading budget discussions. The ministry plans to seek input from other government departments and the Prime Minister's Office. While many departments support tax breaks for the middle class, the administration aims to balance fiscal prudence with taxpayer relief. The government is unlikely to make significant changes to the capital gains mechanism, reflecting a cautious tax policy approach.

Standard Deduction: Purpose and Recent Changes

The standard deduction allows salaried individuals to subtract a fixed amount from their taxable income without providing expense evidence. It applies to both old and new tax regimes. In the 2023 Budget, the government introduced a Rs 50,000 standard deduction for salaried taxpayers and pensioners under the new regime. This change, along with an increased rebate under Section 87A for incomes up to Rs 7 lakh and the elimination of the highest surcharge, made the new regime more attractive.

Economic Impact and Middle-Class Concerns

The middle class, a strong supporter of the Modi regime, has raised concerns about the benefits they receive for their tax contributions, particularly in public healthcare and education. Increasing the standard deduction could address these concerns and boost consumer spending and economic growth.

Currently, individuals with taxable income over Rs 3 lakh face a 5% income tax rate. Industry leaders have proposed adjusting tax rates for higher income brackets to stimulate spending. While raising the standard deduction would benefit all salaried taxpayers, including higher-income earners, it would result in some revenue loss for the government.

Conclusion

As budget discussions continue, the finance ministry must balance the benefits of increasing the standard deduction against its fiscal implications. The final decision will likely reflect a balance between providing relief to taxpayers, especially the middle class and maintaining fiscal responsibility. This move can significantly impact the attractiveness of the new tax regime and shape the financial landscape for lakhs of Indian taxpayers in the coming year.

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