The financial scenario of salaried employees in India has changed drastically over time. But, one important aspect of the Income Tax Act is Section 16(ia), where the standard deduction to which a salary employee gets qualified leaves much room for attention. With inflation arising and the quantum of deduction not rising in tandem, the discrepancy between actual expenditure and items being allowed under the default regime of taxation is turning wide.
Under Section 16(ia), the salaried employee is allowed a standard deduction of ₹75,000 or the amount of salary, whichever is lower, if he or she chooses the default tax regime under Section 115BAC(1A).
If the employee chooses to opt out of the default regime and instead choose the old tax regime, the standard deduction would be ₹50,000 or the amount of salary, whichever is lower.
This deduction is supposed to give relief to employees for expenses incurred during employment. It covers general costs like skill development, commuting, and other work-related expenditures that are typically borne by employees.
However, the current deduction limits have failed to keep pace with the rising cost of living.
Various costs associated with work—upskilling, transportation, professional environment maintenance, and others—employees bear without direct reimbursement or claims.
Though there is some relief from the standard deduction under Section 16(ia), it is only up to a limit that is not indicative of inflationary trends prevalent today.
Over time, money loses purchasing power due to inflation.
The deduction limits are, therefore, of little consequence as the prices rise up to ₹75,000 or ₹50,000.
Further, exemptions under Section 10 like House Rent Allowance (HRA) and Leave Travel Concession (LTC) are at arbitrary levels that were in vogue when the present budget was framed. These too diminish the scope for salaried people to express their actual expenditure through relief from tax.
A simple way to eliminate this discrepancy would be to index the standard deduction with the CII. As is the case for the indexing of long-term capital gains, CII is applied in adjusting long-term capital gains. So, indexing the standard deduction also will ensure:
Equity for Salaried Individual: Given that salaried employees are not businesses, a limited number of deductions would be applicable. Periodical changes in the limit of deduction would be more reflective of their real situation.
Sufficient Relief: There would always be relief to salaried employees in accordance with increased cost of living.
Revenue Protection for the Government: Inflation linkage assures the government proper, predictable adjustments rather than piecemeal ones
This means that businesses are allowed to deduct operational expenses like rent, utilities, and training for staff, but salaried employees can only rely on Section 16(ia) and only get a limited number of deductions, which barely touch the real cost of their operation.
This disparity becomes even more stark when one considers that salaries are taxed at source, offering little flexibility to employees. A revision to the standard deduction, indexed to inflation, can help bridge this gap and provide equitable relief.
Cost Inflation Index (CII) is a familiar mechanism relevant in the Indian taxation environment which is useful to compute indexed cost of acquisition for capital gains tax in case of long-term capital assets. The same reasoning applied to the standard deduction would mean:
Setting the 2023 as the base year for standard deduction. Increasing the deduction limit every financial year, as per the CII.
As, for instance, the standard deduction for 2023 is ₹75,000 and if inflation stands at 5%, then the revised deduction for the year 2024 would be ₹78,750. This method makes it so that deductions grow in line with inflation, protecting the real value of the benefit.
Enhanced Employee Welfare: A higher deduction would reduce taxable income for salaried individuals, offering financial relief.
Fairness Across Taxpayers: The salaried class constitutes a large chunk of the taxpaying population and should be treated at par with other taxpayers, including businesses.
Economic Stimulus: Disposable income in the hands of salaried people can increase spending and, by extension, economic growth.
Revision of standard deduction under Section 16(ia) should be made frequently in order to keep up with inflationary rates and to protect the interest of salaried persons. Linking the same with Cost Inflation Index would make the revision more transparent, systematic, and fair.
Revision will address present-day inequities but will also ensure that tax system does not become outdated by the economic changes.
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