Income Tax Update: Govt Amends Rules to Clarify ₹75,000 Standard Deduction in New Regime

The government has officially amended the Income Tax Act, 1961 to clarify the rules surrounding the increased standard deduction of ₹75,000 under the new tax regime. This change, first announced in the Union Budget 2024, has now been incorporated into the Income Tax Bill, 2025, which has been passed by Parliament. The amendment is expected to take effect from April 1 next year.

Standard Deduction Now Higher in the New Regime

The standard deduction is a flat reduction in taxable income, available only to salaried individuals. Previously, both the old and new tax regimes allowed a standard deduction of ₹50,000. However, as part of the 2024 budget announcements, the government increased the deduction in the new regime to ₹75,000 while keeping it unchanged at ₹50,000 in the old regime.

This deduction effectively reduces an employee’s taxable income, lowering their tax liability. The increase in the new regime is aimed at making it more attractive to taxpayers, especially salaried employees who form a large portion of the tax base.

New Provision in Section 16(ia)

To implement the higher deduction, the Finance (No. 2) Act, 2024 introduced a new provision under Section 16(ia) of the Income Tax Act. The amendment specifies that when calculating taxable income under the head “Salaries,” a deduction should be applied before determining the total income.

Under the old provision, the deduction amount was ₹50,000. The amendment clarifies that for calculations under clause (ii) of sub-section (1A) of Section 115BAC (which applies to the new regime), the same provision will apply but with the revised amount of ₹75,000 instead of ₹50,000.

Statement from the Finance Minister

Finance Minister Nirmala Sitharaman took to social media platform X to announce the clarification. She stated that apart from the new Income Tax Bill, the government is making targeted amendments to the Income Tax Act, 1961 to ensure there is no confusion about the provisions of the new regime.

Her post highlighted that the amendment specifies certain deductions to be made before computing income under the “Salaries” category, ensuring a consistent approach for taxpayers under the revised rules.

Clarification on Unified Pension Scheme (UPS) Benefits

The amendment also addresses ambiguity regarding the Unified Pension Scheme (UPS). It clarifies that the UPS will enjoy the same tax benefits as the National Pension System (NPS). This means contributions to the UPS will qualify for similar deductions and exemptions under the Income Tax Act.

This clarification is expected to benefit a large number of salaried employees who are part of the newly introduced UPS, aligning it with the long-established NPS framework.

Effective Date and Implementation

The revised provisions, including the higher standard deduction, are expected to come into force on April 1, 2026, as part of the implementation of the Income Tax Bill, 2025. This bill will replace the current Income Tax Act, 1961, which has been in effect since April 1, 1962.

Tax experts believe the increase in the standard deduction under the new regime is a significant step toward encouraging more taxpayers to adopt it, as it helps offset the removal of various other deductions that are still available in the old regime.

Key Takeaways for Taxpayers

• Who benefits? Only salaried individuals are eligible for the standard deduction.

• Old regime: Deduction remains at ₹50,000.

• New regime: Deduction increased to ₹75,000.

• Purpose: Reduce taxable income and make the new regime more appealing.

• Effective date: Expected from April 1, 2026.

• Other updates: UPS to have the same tax benefits as NPS.

With the amendment now part of the Income Tax Bill, 2025, salaried taxpayers opting for the new regime will enjoy greater relief starting from the next financial year. Those planning their tax strategy for the upcoming year should consider how the higher standard deduction might influence their choice between the old and new regimes.