As Finance Minister Nirmala Sitharaman prepares to present the last budget of the Modi 2.O government, expectations are building for relief on the personal income tax front. Indications are that the Minister may not disappoint.

An option being discussed actively is raising the standard deduction, which is currently available under both tax regimes. While a standard deduction of ₹50,000 will be available under the new regime from FY24, this amount has been applicable under the old regime since FY20. However, the current thinking is to raise the standard deduction by ₹10,000 under both schemes from FY25 in order to fight inflation, particularly food prices. Though core inflation (headline inflation minus food and fuel inflation) is down, food inflation is getting more uncertain because of unpredictable weather.

Shalini Jain, Tax Partner with EY India, said salaried taxpayers would be expecting an increase in the standard deduction in the upcoming interim budget. “The standard deduction limit, which was last increased in 2019, needs an enhancement given the increased cost of living in the last few years due to inflation and pandemic fallout, such as working from home. The increased standard deduction will help in increasing the net take-home salary for the salaried class, who are otherwise not eligible to claim any direct expenses from their salary,” she said.

While general rates under both the old and new tax regimes are unlikely to be tweaked, a change in thresholds and exemptions may be possible. Government sources said under the old income tax regime, the lower slab of ₹2.5 lakh may be raised by ₹50,000, which could result in a direct saving of ₹1,250. A rise in the lower slab could push up the rebate and ensure that people with an annual income of ₹5.50 lakh do not have to pay tax at all.

Though there have been demands for raising exemptions available under Section 80C of the Income Tax Act for the old tax regime, the government is not keen to do so considering its strategy to popularise the new tax regime, which does not account for exemptions except contributions to the National Pension System (NPS). Since the new tax regime will be the default option from Assessment Year 2024-25 (FY 24), one will have to tick the box in the ITR for continuation of the old tax regime.

Will the upcoming interim Budget have big announcements?

Normally, with the country going to the polls, the government does not make major changes or announce new policies in the interim budget. However, the then-acting Finance Minister, Piyush Goyal, had announced some key measures on the income tax front in the interim budget for FY20. Individual taxpayers with annual taxable income up to ₹5 lakh got a full tax rebate and, therefore, were not required to pay any income tax. Even persons having a gross income up to ₹6.50 lakh did not have to pay any income tax if they had investments in a provident fund, specified savings, insurance, etc.

The FY20 interim budget also raised the standard deduction for salaried persons to ₹50,000 from ₹40,000. This provided a tax benefit of ₹4,700 crore to more than 3 crore salary earners and pensioners. Apart from this, the levy of income tax on notional rent on a second self-occupied house was exempted, and the TDS threshold on interest earned on bank or post office deposits was raised to ₹40,000 from ₹10,000.

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