Standard deduction for salaried employees: ICAI suggests how Budget 2025 can make it better

As the Union Budget 2025 approaches, the Institute of Chartered Accountants of India (ICAI) has proposed changes to the standard deduction rules to help ease the lives of salaried employees.

Under the Income Tax Act, 1961, a standard deduction is permitted from salary income to help employees cover expenses incurred during employment.

However, the amount of standard deduction allowed does not reflect the realities of our times, particularly the rising cost of living due to inflation and different types of new-age expenses that employees have to incur during his/her employment.

For example, employees may have to spend on upskilling to be better at their jobs, but these expenses are not eligible for standard deduction under current rules.

Salaried employees are also allowed some additional exemptions under section 10 but they are subject to upper limits that were fixed several years back. ICAI said these limits "virtually serve no purpose on account of inflation."

How much standard deduction is allowed

If employees want to file taxes under the old regime then the maximum deduction they can claim is reduced to just ₹50,000 or the amount of salary, whichever is lower.

How to make the standard deduction better

"It is suggested that the standard deduction u/s 16 (ia) under the default tax regime under section 115BAC(1A) may be enhanced keeping in mind the rate of inflation and purchasing power of the salaried individuals. It may be linked to cost inflation index (CII) for regular enhancement in deduction amount," the ICAI said in its pre-budget memorandum to the government.

The ICAI further said the standard deduction be revised annually based on CII, just like it happens for income under the head capital gains.

New head of income

The ICAI has also recommended adding a sixth head of income "Income from shares and securities". This will further simplify the taxation of income from shares and securities through dividends, interest, and capital gains.

Currently, different types of incomes are taxed under five heads:

1. Salaries
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources.

As per ICAI, there used to be a sixth head for tax calculation called, 'Interest on Securities' which was removed by the Finance Act, 1988 with effect from April 1, 1989.