Understanding Standard Deduction: A Key Tax Benefit

Introduction

Understanding various tax deductions can have a big impact on a person’s tax liability, which is why taxation is a crucial component of financial planning. The standard deduction is one of the most popular deductions because it makes tax filing easier by lowering taxable income without requiring itemization of deductions. This blog examines the standard deduction’s advantages, qualifying requirements, most current revisions, and contrasts with itemized deductions.

What is the Standard Deduction?

Taxpayers can lower their overall tax liability by deducting a certain amount from their taxable income, known as the standard deduction. It is a substitute for itemized deductions, which call for thorough documentation of all allowable expenses, including charitable contributions, mortgage interest, and medical bills. Without the hassle of itemization, the standard deduction offers a simple method of claiming tax savings.The standard deduction’s main benefit is its ease of use, which is why most taxpayers choose it.

The standard deduction is a set amount that can be claimed without further paperwork, in contrast to itemized deductions, which require taxpayers to keep note of all allowable expenses.

Who is Eligible for the Standard Deduction?

Most taxpayers can claim the standard deduction. However, eligibility depends on factors such as filing status, age, and disability status. The following groups may claim the standard deduction:

• Salaried Individuals: Employees receiving a salary from an employer can claim the standard deduction.
• Pensioners: Retired individuals receiving pensions are also eligible.
• Hindu Undivided Families (HUFs): Members of HUFs who earn taxable income can claim this deduction.
• Senior Citizens: Taxpayers above 60 years of age qualify for the standard deduction.
• Family Pensioners: Individuals receiving a pension on behalf of a deceased family member can also avail of this deduction.

Certain individuals, such as non-resident taxpayers, may not be eligible for the standard deduction. Additionally, taxpayers opting for itemized deductions cannot claimo

Benefits of the Standard Deduction

1. Simplifies Tax Filing: The procedure is made simpler for taxpayers by eliminating the requirement to monitor and record numerous expenses.

2. Lowers Taxable Income: It benefits all qualified individuals by assisting in lowering total tax obligations.

3. Automatically Adjusted for Inflation: To reflect inflation and growing expenses, the government updates the standard deduction on a regular basis.

4. Reachable by the Majority of Taxpayers: accessible to a wide spectrum of people, including seniors and salaried workers.

5. No Proof or Documentation Needed: The standard deduction can be claimed without the need for extra documentation, in contrast to itemized deductions, which call for receipts and records.

Standard Deduction Amounts for FY 2024-25 (India)

The standard deduction under the Indian tax system is: ₹75,000 for salaried individuals and pensioners (under the new tax regime)• Pensioners and salaried individuals: ₹50,000 (under the previous tax regime)

• Pensioners who are family members: ₹25,000 under the new tax system, ₹15,000 under the previous one

The new tax regime’s increase in the standard deduction is intended to lower employees’ taxable income and give middle-class taxpayers more tax relief. These changes encourage more people to switch to the new tax regime by making it more enticing.

Example

Imagine a salaried person who makes ₹10,000,000 a year. Under the new tax regime, their taxable income drops to ₹9,25,000 if they choose to take the standard deduction of ₹75,000. This lowers their overall tax burden. The deduction stays at ₹50,000 if they choose for the previous tax scheme, which leaves them with ₹9,50,000 in taxable income.

Under the new tax structure, retirees who receive ₹8,00,000 in total pension income each year can claim ₹75,000, which lowers their taxable income to ₹7,25,000. They could only claim ₹50,000 under the previous tax system, which would have left them with ₹7,50,000 in taxable income.

Itemized vs. Standard Deduction:

The standard deduction and itemized deductions are options available to taxpayers. The choice is based on which option saves more money on taxes.

When to Select the Conventional Deduction:

• If your deductible expenses are low.
• If you don’t want to keep track of and record several deductions.
• If the entire amount of your allowable deductions is less than the standard deduction.

Selecting Itemized Deductions at the Right Time

• If your philanthropic contributions, house loan interest, or medical bills are considerable.
• If the entire amount of your allowable deductions is greater than the standard deduction.
• In the event that you have sizable business expenses that are deductible. If a taxpayer has ₹50,000 in home loan interest, ₹30,000 in donations, and ₹1,20,000 in medical expenditures, for instance, itemizing these deductions will save more money on taxes than the standard deduction.

Recent Changes and Updates

1, The standard deduction for salaried individuals has been raised from ₹50,000 to ₹75,000 under the new tax regime, effective from FY 2024–2025.

2. Family Pensioners’ Deduction: Under the new tax system, the deduction has been raised from ₹15,000 to ₹25,000.

3. New Tax System (2020 and Upward): Both the old and new tax systems provide the standard deduction, with the latter offering more advantages.

4. Possible Future Revisions: Depending on inflation and the state of the economy, the government may make additional adjustments to the deduction amount.

5. Promotion of the New Tax Regime: The hike in the standard deduction under the new tax regime is a component of a larger initiative to persuade taxpayers to choose it over the previous one.

Future Prospects and Considerations

The administration may make more changes as it continues to assess how well the new tax system is working. Legislators could think about:

• Raising the Standard Deduction Additionally: To give seniors and salaried workers more assistance.
• Expanding the benefits of the standard deduction to include more taxpayers, including independent contractors.
• Modifying Deduction Amounts for Various Income Brackets: To improve the fairness of the tax system.

Conclusion

One useful tax advantage that lowers taxable income and makes filing easier is the standard deduction. Pensioners and salaried individuals benefit more from the recent improvements made under the new tax structure. Comprehending eligibility and the most recent developments guarantees that taxpayers optimize their savings. Before filing, people should decide if thestandard deduction is the best option for them or if itemizing deductions would result in more tax reduction.

It is essential to stay up to date on deductions and exemptions due to the growing number of changes in tax laws. To make the best tax choices, taxpayers should evaluate their financial status and, if required, seek advice from a tax professional.

References

• Income Tax Department, India. “Standard Deduction Guidelines.”

https://incometaxindia.gov.in

• Ministry of Finance, India. “Union Budget 2024 and Tax Reforms.”

https://www.indiabudget.gov.in

• Central Board of Direct Taxes (CBDT). “Taxpayer Guide to Deductions and Exemptions.”

https://www.incometaxindiaefiling.gov.in

• Economic Times. “Understanding Standard Deduction in India.”

https://economictimes.indiatimes.com

• Business Standard. “Comparison of Old and New Tax Regime Benefits.”

https://www.business-standard.com

• The Hindu Business Line. “Tax Planning Strategies for Salaried Individuals.”

https://www.thehindubusinessline.com

• ClearTax. “Standard Deduction Updates for FY 2024-25.”
• https://cleartax.in/s/standard-deduction-salary

*****

This blog is written by Shifali, 4th year B.A. LL.B.(Hons.) student of Lovely professional University.