Income-tax slabs take centre stage in every Union Budget, and rightfully so, as they determine the disposable income in the hands of an individual.
Slab revisions do offer immediate clarity on potential tax savings; but an equally important pillar for individuals are deductions and exemptions. These are central to how India's tax system ensures fairness, supports essential life needs, and encourages financial discipline. These provisions are more policy instruments designed to balance revenue collection with social equity and long-term financial stability.
To understand this balance, let us first familiarise how salary income is computed. Typically, taxable salary is derived by deducting exempt allowances such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and other specified allowances, along with the standard deduction, from gross income. This means deductions and exemptions reduce taxable salary income even before tax slabs are even applied. These mechanisms ensure that taxation considers real life expenses and not just headline earnings.
Let us guage the impact of an exemption and deduction, with an example relating to income from house property. The tax law allows a flat 30% deduction on net annual, along with a deduction of up to Rs 2 lakh on home loan interest for self occupied properties. These provisions can reduce taxable income independent of the slab rates, directly supporting homeowners who carry long term financial commitments. Unlike slab revisions—which offer uniform relief to all taxpayers—these targeted deductions recognize real financial burdens and deliver personalised tax savings that reflect an individual's circumstances.
The introduction of the New Tax Regime, with lower rates but significantly fewer exemptions, has revived public debate about the value of deductions. While many exemptions were removed, some—like the standard deduction, retirement benefits, and employer contributions to NPS/PF—continue under the simplified system. This shows that exemptions and deductions remain integral even when the system aims for simplicity.
Further, exemptions and deductions are designed not merely as tax benefits, but as tools to encourage responsible financial behaviour. These measures incentivize individuals to invest in retirement schemes, purchase health insurance, plan for children's education, and save consistently.
Government policy direction also aligns with this philosophy. Union Budget 2024–25 introduced enhanced standard deduction (from Rs 50,000 to Rs 75,000) to support taxpayers, particularly those choosing the New Regime. The Ministry of Finance highlighted that these improved provisions, aim to simplify the tax system while still offering meaningful relief to salaried employees and pensioners. So even when slabs remain unchanged, targeted deduction and exemption enhancements can significantly boost disposable income.
In the Budget Speech of Finance Bill 2020, where the New Regime was introduced, the Finance Minister said that she would review and rationalise the remaining exemptions and deductions in the coming years, to further simplify the tax system and lower the tax rate. The Finance Minister should now incentivise individuals by allowing additional deductions under the default New Regime, thereby reducing the effective tax rate and consequently, increasing disposable income in the hands of an individual.
To conclude, along with slab changes, enhanced deductions and exemptions play a critical role in promoting financial discipline and in driving smart financial behaviour among individuals. The two must evolve together. The following illustration demonstrates the importance of deductions and exemptions along with the slab changes.
Exemptions + Deductions vs Slab Cuts
Scenario
- Taxpayer Mr. A: Salary Rs 35 lacs
- Pays rent and eligible for HRA exemption
- Has 80C and 80D deductions
A. With Enhanced Exemptions & Deductions
HRA Exemption (example value)
Let's assume eligible HRA exemption: Rs 1,50,000
Other deductions
- 80C = Rs 1,50,000
- 80D = Rs 40,000
- Standard deduction = Rs 50,000
Total deductions + exemptions
= 1,50,000 + 1,50,000 + 40,000 + 50,000
= Rs 3,90,000
Taxable income
Rs 18,00,000 – Rs 4,15,000 = Rs 31,10,000
Tax saved due to deductions/exemptions
Tax without any benefits: slabs applied on Rs 35,00,000
Tax with benefits: slabs on Rs 30,85,000
Tax under old regime = Rs 533,520
B. With Slab Reduction Alone
Taxable income (assuming no exemptions/deductions): Rs 35,00,000
Tax under default regime = Rs 897,000
Thus, it is seen that exemptions and deductions play a crucial role in reducing the effective tax rates, even without considering the slab rate changes.
(Article is authored by Hiren Shah, Executive Director of Deloitte Haskins & Sells LLP India and Geeta Bhatia, Director, Deloitte India of Deloitte Haskins & Sells LLP, assisted by Sahil Sachdeva, Assistant Manager of Deloitte Haskins & Sells LLP)
