Budget 2022: Increase Standard Deductions and Income Tax Relief for Saving for Children’s Education

The standard deduction for salaried taxpayers was reestablished at Rs 40,000 from FY2018-19 onwards, in lieu of the elimination of tax exemptions for transportation allowance of Rs 19,200 and medical reimbursement of Rs 15,000, which were repealed in fiscal year (FY) 2005-06. From FY2019-20, the deduction ceiling was increased to Rs 50,000.

Given the recurrent cost of inflation over the years and the current living expenses of paid workers, the amount of deduction is relatively low. Since the outbreak of the Covid-19 epidemic, household spending has been negatively impacted by rising medical costs and work-from-home expenses such as furniture, energy, and the Internet. As a result, the present standard deduction limit of Rs 50,000 should be increased to at least Rs 75,000. Individuals will have a financial cushion to help them get through these extraordinary times.

Furthermore, many nations, including the United States, the United Kingdom, Canada, and Ireland, have implemented tax exemptions for Covid-19-related medical expenses (such as medical supplies, testing kits, and so on) as well as work-from-home expenses, such as home office setup. In India, however, no comparable deduction or exemption has yet been implemented. As a result, raising the standard deduction limit would give individuals more financial flexibility in incurring the aforementioned expenses.

Furthermore, taxpayers who choose the concessional optional regime under section 115BAC of the Income-tax Act, 1961 may be eligible for the standard deduction. For paid individuals and pensioners, the standard deduction is a deduction allowed from gross salary income. This deduction lowers the individual’s taxable salary income, lowering his or her tax burden as well.

The necessity for a tax deduction for children’s higher education savings

Saving for a child’s higher education is an important financial objective for everyone, and most people set aside a percentage of their salary for this purpose. Except for the Sukanya Samriddhi Yojana, which is specifically for a girl child, there is currently no express deduction or exemption for such funds. Because the deduction is combined within the section 80C limit of Rs 1.5 lakh per year, the tax benefits are likewise minimal. Other tax-saving investments/expenditures (such as Employees’ Provident Fund, Public Provident Fund, principal repayment of a home loan, children’s tuition fee, National Funds Certificate, etc.) are covered by this deduction, leaving little room for higher education savings to be claimed.

A separate deduction of at least Rs 1.5 lakh for education funds would be a welcome gesture in this direction. To ensure that such money are not misappropriated, the account proceeds (including any interest earned) may be paid directly to educational institutes as soon as the child is accepted for higher study. Alternatively, the education expense deduction (including tuition expenses) might be separated from the section 80C deduction and recognized as a distinct item.

In a nutshell, an increase in the standard deduction and additional deduction for college expenses will encourage more long-term savings while also incentivizing individuals through tax benefits.