The government is working to make the latest tax rules (introduced in the financial year 2020-21) more appealing compared to the old ones. In the 2023 Budget, a standard deduction of Rs 50,000 from salary and pension income was permitted in the new tax system. Previously, this deduction was only available in the old tax system. Consequently, starting from the financial year 2023-24, the new tax system provides two deductions that a salaried individual can claim to reduce income tax: the Standard deduction and contributions to the National Pension System (NPS) made by the employer to the employee's account.

However, experts in taxation suggest that additional income tax deductions should be offered under the new tax system to attract a broader range of salaried individuals. It's worth noting that the new tax system provides reduced income tax rates and more tax brackets but does not include deductions under sections such as 80C or 80D.

Here's how Budget 2024 can enhance the appeal of the new tax system for salaried workers, as suggested by experts.

 

  1. The finance minister could introduce three tax advantages under the new tax system: raising the standard deduction amount, offering tax incentives for long-term investments, and introducing tax exemptions for specific allowances. Increasing the standard deduction for salaried individuals would directly boost their take-home pay and provide some tax relief. Similarly, certain deductions, like contributions to the National Pension System (NPS), medical insurance premiums under Section 80D, housing loan interest up to Rs 2 lakh, and interest earned on savings bank accounts under Section 80TTA, should be extended to the new tax system. This move would encourage equal access to healthcare and promote savings and investments among taxpayers. Additionally, making certain allowances received by salaried individuals, such as transport allowance, tax-exempt would reduce their tax burden.
  2. Many Indian taxpayers tend to invest their savings initially in avenues offering deductions under Section 80C of up to Rs 1.5 lakh. Similarly, the salaried class benefits from exemptions like house rent allowance (HRA), leave travel allowance (LTA), and housing loan interest. To enhance the acceptance of the new tax system, the government should allow similar deductions. For instance, employee contributions to the Employees' Provident Fund (EPF) under Section 80C and contributions to NPS under Section 80CCD(1b) up to Rs 50,000 could be included. This move would also encourage individuals to save for retirement. The coexistence of two tax systems has created complexity for taxpayers. Therefore, a clear plan for transitioning to a single taxation system is necessary.
  3. The government should consider raising the standard deduction limit under the new tax system. This would alleviate the tax burden on salaried individuals, enabling them to keep more of their earnings. Additionally, HRA should be included in the new tax system for those paying higher rents. Moreover, introducing deductions under Sections 80C and 80D would provide further opportunities for individuals to save on taxes while fostering responsible financial planning and investment within the new tax system.