Income-tax slabs invariably take centre stage during every Union Budget—and rightly so—since they directly determine the disposable income available to individuals. Changes in slab rates provide instant clarity on tax outgo. However, focusing solely on slabs overlooks another equally powerful pillar of India’s personal tax framework: deductions and exemptions.
These provisions are not merely concessions. They are policy tools designed to balance revenue collection with social equity, support essential life expenses, and encourage responsible financial behaviour. In many cases, deductions and exemptions deliver more meaningful and personalised tax relief than slab cuts alone.
How Salary Income Is Taxed
To appreciate this balance, it is important to understand how taxable salary is computed. Typically, taxable income is arrived at after deducting exempt allowances—such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), and other specified allowances—along with the standard deduction, from gross salary.
This means deductions and exemptions reduce taxable income even before tax slabs are applied. These mechanisms ensure that taxation reflects real-life expenses and long-term financial commitments, rather than just headline earnings.
Impact of Deductions: A House Property Example
Consider income from house property. The Income-tax Act allows:
- A flat 30% deduction on net annual rental income, and
- A deduction of up to ₹2 lakh on home loan interest for self-occupied properties.
These benefits reduce taxable income independent of slab rates, offering direct support to homeowners with long-term liabilities. Unlike slab reductions—which provide uniform relief—such deductions recognise individual financial burdens and deliver customised tax savings.
New Tax Regime and the Deductions Debate
The introduction of the New Tax Regime, offering lower tax rates but fewer exemptions, has reignited debate around the relevance of deductions. While several exemptions were removed, key benefits—such as the standard deduction, retirement benefits, and employer contributions to NPS and PF—continue even under the simplified regime.
This underlines a crucial point: exemptions and deductions remain integral, even when the system prioritises simplicity.
Encouraging Financial Discipline
Importantly, these provisions are not designed solely to reduce tax liability. They actively encourage individuals to:
- Invest in retirement instruments
- Purchase health insurance
- Plan for children’s education
- Build disciplined, long-term savings habits
This philosophy is reflected in recent government policy decisions.
Budget 2024–25: Strengthening Deductions
In Union Budget 2024–25, the government enhanced the standard deduction from ₹50,000 to ₹75,000, particularly benefiting taxpayers opting for the New Regime. The Ministry of Finance emphasised that these changes aim to simplify taxation while continuing to provide meaningful relief to salaried individuals and pensioners.
This demonstrates that even without altering tax slabs, targeted improvements in deductions and exemptions can significantly increase disposable income.
Notably, during the introduction of the New Regime in Finance Bill 2020, the Finance Minister had stated that remaining exemptions and deductions would be reviewed and rationalised over time. As the New Regime increasingly becomes the default, there is now a strong case for introducing additional targeted deductions, helping reduce effective tax rates and boosting household consumption.
Illustration: Exemptions & Deductions vs Slab Cuts
Scenario
- Taxpayer: Mr A
- Annual Salary: ₹35 lakh
- Pays rent (eligible for HRA)
- Eligible for deductions under Sections 80C and 80D
A. With Exemptions & Deductions
Exemptions and deductions assumed:
- HRA exemption: ₹1,50,000
- Section 80C: ₹1,50,000
- Section 80D: ₹40,000
- Standard deduction: ₹50,000
Total exemptions & deductions:
₹3,90,000
Taxable income:
₹35,00,000 – ₹3,90,000 = ₹31,10,000
Tax under Old Regime (approx.):
₹5.33 lakh
B. With Slab Reduction Alone (No Deductions)
Taxable income: ₹35,00,000
Tax under default slab rates:
₹8.97 lakh
Key Takeaway
Even without any slab rate changes, exemptions and deductions significantly reduce effective tax rates and overall tax liability. They remain a critical instrument in ensuring fairness, encouraging smart financial behaviour, and protecting long-term household finances.