New Delhi, March 14: The decision to abolish standard deduction ' a privilege enjoyed by the salaried class ' could backfire.
The Congress-led government is waking up to the fact that the removal of the standard deduction has sparked a greater furore among the lower middle class, who constitute the bulk of voters in urban constituencies, than even possibly the new tax on fringe benefits. The fringe tax has received wider publicity because of protests from the industry lobby.
The bulk of salaried taxpayers, including pensioners, earn less than Rs 2.5 lakh a year. Many of them cannot even think of investing Rs 1 lakh ' or 40 per cent of their income ' in a range of savings instruments to qualify for the maximum possible tax deduction.
Their best way to obtain some relief was the standard deduction allowed to all salaried taxpayers because they could not show personal expenses as business-related expenditure as companies can.
Successive governments have bought this logic and allowed standard deduction. The BJP government had toyed with the idea of scrapping it, but retreated in the face of resistance from its own MPs.
Standard deduction meant a straight forward Rs 30,000 addition to the limit till which income is not taxed for those with a gross salary of up to Rs 5 lakh a year. For those earning above that level, the deduction was Rs 20,000.
'The removal of standard deduction is perhaps the one single point where popular anger may focus. We are aware of that; it is a big issue and also represents a large amount of money which comes into the tax net,' said a finance ministry official.
S. Basu, a public finance analyst, added: 'Pensioners hardly ever save. Indians follow a standard economic theory. They save in the middle age and spend in their youth and old age. But old age spending is a necessity as real incomes go down while expenses on medicare, etc go up.'
In other words, savings are tougher because of the ever-increasing cost of living against a fixed income in the case of pensioners and difficult for young salary earners as their incomes tend to be low and they have yet to develop a savings habit.