Standard Deduction Simplified: What to Expect in India’s New Tax Regime

The new tax regime introduced by the Indian government in recent years aims to simplify the tax structure, offering taxpayers the choice of lower tax rates with fewer exemptions and deductions. A key feature of this regime, which has garnered attention in the recent budget announcements, is the standard deduction in the new tax regime. While tax deductions traditionally allowed salaried individuals and pensioners to reduce their taxable income, the introduction of the standard deduction in the new tax regime  provides a simplified way to claim relief without having to worry about specific exemptions or complex tax-saving investments. Let’s dive deeper into what this deduction is all about and how it benefits taxpayers.

What is the Standard Deduction in the New Tax Regime?

As of the 2024-25 financial year, the standard deduction in the new tax regime has been set at ₹75,000 for salaried individuals and pensioners. This is an increase from the earlier ₹50,000 in the previous years under the old tax regime. The standard deduction in the new tax regime is a fixed deduction that is automatically subtracted from the taxable income of eligible taxpayers, thereby reducing their overall tax liability.

In the previous tax system, individuals had to keep track of various exemptions and deductions such as medical expenses, house rent, and investments under Section 80C. However, the new regime aims to eliminate such complexities by offering a straightforward reduction in taxable income. 

Income tax slabs under new tax regime for FY 2024-25

Key Features and Benefits of the Standard Deduction

1. Automatic Deduction for Salaried Individuals : 

The standard deduction in the new tax regime applies to all salaried individuals and pensioners, and it is available regardless of whether they make investments or claim other deductions.

2. No Need for Specific Investments : 

Under the new regime, there is no requirement to invest in certain tax-saving instruments like Public Provident Fund (PPF) or National Savings Certificates (NSC) to avail of tax benefits. The standard deduction in the new tax regime ensures that you can save on taxes without any investment obligation.

3. No Documentation Required : 

Since the deduction is fixed at ₹75,000, there is no need for additional documentation or evidence of expenses, making the filing process more convenient.

4. Lower Taxable Income :

 For individuals whose salary falls into the higher tax brackets, the standard deduction in the new tax regime can help reduce the total taxable income, leading to a lower tax outflow.

5. A Simpler Approach : 

For those who do not have the time or inclination to track tax-saving investments, the standard deduction in the new tax regime is a simpler and more accessible way to reduce taxable income.

How Does It Compare to the Old Tax Regime?

The key difference between the new and old tax regimes lies in the structure of deductions. In the old tax regime, a taxpayer could claim various deductions such as those under Section 80C, 80D, and others, including the standard deduction. However, in the new tax regime, the standard deduction is the only available benefit, with no room for other exemptions or deductions.

This can be advantageous for taxpayers who have minimal deductions under the old regime, as the new tax regime provides a reduced tax rate on a broader income range. But for individuals who claim various exemptions and deductions, the old regime might still be preferable.

Tax Impact Example

To illustrate how the standard deduction in the new tax regime works, let’s consider an example:

If an individual’s annual income is ₹7,75,000, and they opt for the new tax regime, the standard deduction in the new tax regime of ₹75,000 will automatically reduce their taxable income to ₹7,00,000. This allows them to avail of the ₹7 lakh tax rebate, making their overall tax liability zero.

How Does the Standard Deduction in the New Tax Regime Affect Your Tax Filing?

Taxpayers opting for the new tax regime will find that the filing process is simpler due to the limited number of deductions to consider. The standard deduction in the new tax regime is directly applied to your income, so you do not have to worry about tracking various exemptions. 

However, it’s crucial to note that if you want to benefit from deductions under Section 80C, or exemptions like HRA (House Rent Allowance), you would need to opt for the old tax regime instead. You can choose your preferred tax regime each year when filing your returns, depending on your income and the deductions available.

Advantages of Choosing the Standard Deduction in the New Tax Regime

With the inclusion of the standard deduction in the new tax regime, several benefits have emerged:

1. Reduced Documentation: As the new tax regime minimizes the need for deductions and exemptions, the standard deduction offers some relief without complex documentation.
2. Simplified Tax Filing: The new tax regime’s flat deduction structure makes tax filing easier, especially for those without significant investments or loans.
3. Enhanced Take-Home Pay: By reducing taxable income, the standard deduction helps improve net take-home pay for salaried individuals and pensioners alike.

In case of taxpayers having income from business and profession” and who want to opt out of the new tax regime, the assessee would be required to furnish Form 10-IEA on or before the due date u/s 139(1) for furnishing the return of income. Also, for the purpose of withdrawal of such an option i.e. opting out of the old tax regime shall also be done by way of furnishing Form No.10-IEA. New tax regime is the default tax regime. However, taxpayers can opt for the old regime.

FAQs

1. What is the difference between the old and new tax regimes?

The main distinction between the old and new tax regimes lies in their tax slabs, rates, and the availability of deductions. The old tax regime allows various deductions and exemptions, providing options to reduce taxable income through investments and specific expenses. The new tax regime offers lower tax rates but limits the number of deductions and exemptions available.

2. Which tax regime is better – the old or the new?

The choice between the old and new tax regimes varies depending on individual financial circumstances. Taxpayers should evaluate their potential tax liabilities under both regimes to determine which one provides the most savings. The Income Tax Portal offers an Income and Tax Calculator to help taxpayers estimate and compare their tax liabilities under each regime.

3. Do employees need to inform their employers about their chosen tax regime?

Yes, employees must inform their employers of their chosen tax regime at the start of the financial year. If an employee does not provide this information, the employer will assume that the default tax regime applies. Employers will then calculate tax deductions based on this default unless informed otherwise. However, this initial declaration to the employer does not constitute the final decision; the employee can still make a formal choice while filing their income tax return, as per Section 115 BAC of the Income Tax Act.

4. Can salaried taxpayers claim HRA exemption under the new tax regime?

The House Rent Allowance (HRA) exemption, allowed under the old regime under Section 10(13A), is not available in the new tax regime. This means taxpayers who want to claim HRA exemption would need to select the old tax regime.

5. Can Chapter VI-A deductions like Section 80C, 80D, 80DD, and 80G be claimed under the new tax regime?

No, the new tax regime restricts most Chapter VI-A deductions, such as Sections 80C, 80D, 80DD,and 80G. However, exceptions include deductions under Sections 80CCD(2), 80CCH, and 80JJAA. Taxpayers who wish to claim these deductions should opt for the old tax regime, which can be done by selecting the appropriate option in their Income Tax Return (ITR) filing form.

Conclusion

The introduction of the standard deduction in the new tax regime  is a significant step toward simplifying the taxation process in India. With a fixed ₹75,000 deduction for salaried individuals and pensioners, taxpayers can enjoy lower tax liabilities without the need for complex calculations or investments. However, the choice between the new and old tax regimes should be made carefully, taking into consideration your income, the deductions you currently claim, and your overall tax-saving strategy. For the most up-to-date information, taxpayers can refer to government portals like the Income Tax Department’s website and consult experts to ensure they are making the best choice for their financial situation.