Old vs new tax regime: How standard deduction works and who benefits

As the ITR filing season gathers pace, our 'KNOW YOUR TAX' series breaks down key tax benefits. In the first part, we explain the standard deduction and how it works under the old and new tax regimes.

In Short

• Income tax filing deadline for ITR-1 and ITR-2 is July 31
• Standard deduction is automatic and needs no paperwork
• Old regime offers Rs 50,000, new regime offers Rs 75,000 deduction

The income tax filing season is in full swing, and with the July 31 deadline approaching for ITR-1 and ITR-2 filers, many salaried taxpayers are asking the same question: Which tax regime will help me save more tax?

While there are several deductions and exemptions to consider, one benefit stands out because it is simple, automatic and available without any paperwork, i.e., the standard deduction.

Whether you choose the old tax regime or the new one, you can claim this benefit if you are eligible. However, the amount you can claim is different under the two regimes, and that difference could influence your tax bill.

WHAT IS THE STANDARD DEDUCTION?

The standard deduction is a flat amount that is deducted from your salary or eligible pension income before your tax is calculated. Unlike deductions under Sections 80C or 80D, you do not have to make any investment or submit bills to claim it.

Nishant Shanker, Chartered Accountant, Tax & Investments at Navraj Global Advisors, explains, "The standard deduction is one of the simplest tax benefits available to salaried employees and pensioners as it allows a flat deduction from salary income without requiring any proof of expenditure or investment."

He adds that, unlike deductions under Sections 80C or 80D, it is automatically available and reduces your taxable salary before your tax liability is calculated.

HOW MUCH STANDARD DEDUCTION CAN YOU CLAIM?

The amount depends on the tax regime you choose.

Under the old tax regime, salaried employees and eligible pensioners can claim a standard deduction of Rs 50,000.

Under the new tax regime, the deduction has been increased to Rs 75,000, making it more attractive for many salaried taxpayers.

According to the Income Tax Department, the standard deduction is available to all salaried employees irrespective of whether they work in the government or private sector. Eligible pensioners can also claim the deduction.

However, the department clarifies that this benefit is available only if the pension is taxable under the head 'Income from Salaries'. Pension that is taxed under 'Income from Other Sources' does not qualify for the deduction.

WHY IS THE NEW TAX REGIME GAINING ATTENTION?

The higher standard deduction is one of the reasons many salaried employees are considering the new tax regime this year.

Shanker says, "While it is available under both the old and the new tax regimes, the deduction currently stands at Rs 50,000 under the old regime and Rs 75,000 under the new regime, making the latter relatively more attractive for many salaried taxpayers."

However, taxpayers should remember that the standard deduction is only one part of the calculation. The old regime still offers several deductions and exemptions, such as those under Section 80C and Section 80D, which may make it more beneficial for some individuals depending on their investments and expenses.

WHY WAS THE STANDARD DEDUCTION INTRODUCED?

The standard deduction replaced earlier exemptions such as transport allowance and medical reimbursement, making the tax system simpler for salaried taxpayers.

But according to Shanker, it may now be time to revisit the deduction amount under the old regime.

"Rising inflation, increasing commuting costs, hybrid work arrangements and higher day-to-day employment-related expenses suggest that the deduction under the old regime may require a review. There is a need for periodic indexation so that its value does not erode over time," he says.

SHOULD MORE TAXPAYERS GET THIS BENEFIT?

At present, the standard deduction mainly benefits salaried employees and eligible pensioners.

Shanker believes the discussion should go further.

"While salaried employees and pensioners enjoy this benefit, professionals and small business owners, who also incur work-related expenses, do not receive a comparable flat deduction," he says.

He adds that as the government continues to simplify the tax system, policymakers should also examine whether the current deduction adequately reflects the cost of earning an income in today's economy.

In other words, the standard deduction remains one of the easiest ways for salaried employees and eligible pensioners to reduce their taxable income. Since it is granted automatically, there is no need to make investments or collect supporting documents to claim it.

If you are deciding between the old and the new tax regime this filing season, compare your total tax liability under both options instead of looking only at the higher standard deduction. The right choice will depend on your salary, investments, deductions and overall financial situation.

- Ends