Standard deduction for salaried may return

Ahead of the annual budget, here's some cheer for salaried employees and pensioners. The finance ministry is considering bringing back standard deduction of up to Rs 20,000 in individual taxable incomes.

According to revenue department officials, the government may be willing to take a small hit in return for a spike in spending that it hopes will result from a bigger disposable income with the salaried classes.

Till the budget for 2005-06, a standard deduction of Rs 30,000 or 40 per cent of income, whichever was lower, was allowed to salaried employees with an annual income between Rs 75,000 and Rs 5 lakh. For those earning more, the standard deduction was fixed at Rs 20,000.

The standard deduction was meant to compensate salaried people for the fact that self-employed small businesspersons or entrepreneurs paid tax only on their net income after deducting business expenditure.

Industry has been demanding the re-introduction of standard deduction so that individual taxpayers are able to spend more and stimulate domestic demand. As Indira Gandhi's finance minister, Pranab Mukherjee had in fact, raised it from Rs 5,000 to Rs 6,000 in the budget for 1983-84.

"There are two ways of looking at reducing personal tax. One option before the government is to do away with surcharges. The other option would be to give relief to individual earnings up to a particular level. In other words, keeping in mind fiscal deficit constraints, the benefit could be extended to only lower income earners. This would help reduce administrative burden of the department and focus on the big fish," said Sudhir Kapadia, Partner, Taxation, Ernst & Young.

P Chidambaram had as finance minister removed the standard deduction after overhauling tax slabs and raising the exemption limit to Rs 1 lakh. He had introduced three slabs of 10 per cent, 20 per cent and 30 per cent for individuals in the Rs 1 lakh to Rs 1.5 lakh income bracket, Rs 1.5 lakh to Rs 2.5 lakh and over Rs 2.5 lakh respectively.

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