With the Union Budget 2025 set to be presented on February 1, Finance Minister Nirmala Sitharaman faces mounting expectations for tax relief as inflation rises and disposable income shrinks. Among the most anticipated measures is an increase in the standard deduction, a tax break that provides relief to salaried individuals. Experts are pushing for a higher standard deduction threshold of Rs 1 lakh, which could give a much-needed boost to taxpayers.
What is Standard Deduction?
A standard deduction is a flat amount automatically deducted from an individual's annual income, reducing taxable income and thus lowering tax liability.
For example, if your annual taxable income is Rs 10,00,000 and you qualify for a standard deduction of Rs 50,000, your taxable income is reduced to Rs 9,50,000, resulting in a lower tax burden.
Standard Deduction under the Old and New tax regimes
- Old Tax Regime: Taxpayers under the old system can avail of a standard deduction of Rs 50,000, a benefit that has been in place since 2018. Before that, the deduction stood at Rs 40,000. Historically, the standard deduction was removed in FY 2005-06 but reintroduced in Budget 2018 by Arun Jaitley at Rs 40,000, replacing transport and medical allowances.
- New Tax Regime: Initially, the new tax regime offered no standard deduction, but that changed in 2023 with the introduction of a Rs 50,000 standard deduction. In 2024, this was increased to Rs 75,000, providing more relief under the new structure.
Who is eligible for Standard Deduction?
Salaried individuals and retired taxpayers are eligible for the standard deduction while filing their Income Tax Returns (ITR). Self-employed individuals and Hindu Undivided Families (HUF) are not eligible for this deduction.
Other key tax changes expected in Budget 2025
Section 80C: Expected Changes
Section 80C allows deductions on investments like LIC, PPF, EPF, and NSC, with a current limit of Rs 1.5 lakh. Experts suggest raising this limit to Rs 2 lakh to encourage more savings. There is also an extra Rs 50,000 deduction for NPS investments.
HRA Exemption: new tax regime issues
The New Tax Regime does not offer House Rent Allowance (HRA) exemptions. Tax experts recommend including HRA to make it more attractive for people who rent their homes.
