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As Budget 2025 approaches, expectations are high for further reforms building on the transformative changes introduced in Budget 2024. The government’s comprehensive review of the Income Tax Act, 1961, aimed to simplify and modernize the tax system, addressing ambiguities and creating a more transparent, efficient, and fair tax regime.
Calls for Reforms Under the New Tax Regime
Economists and taxpayers alike are advocating for higher exemption limits, improved tax slabs, and enhanced standard deductions under the New Tax Regime. In the 2024 Budget, the standard deduction was increased from ₹50,000 to ₹75,000, while the exemption limit was raised to ₹3 lakh. These revisions aimed to offer greater relief to taxpayers and streamline compliance.
In its pre-Budget recommendations, the State Bank of India (SBI) proposed bold changes, including eliminating exemptions under the Old Tax Regime and transitioning all taxpayers to the New Tax Regime. This shift, affecting over 8.2 crore taxpayers, aims to simplify the tax structure and promote uniformity. SBI also suggested raising the National Pension System (NPS) contribution limit from ₹50,000 to ₹1 lakh and increasing the medical insurance exemption under Section 80D from ₹25,000 to ₹50,000.
Budget 2025: SBI urges higher healthcare spending, uniform GST on medical devices and tax exemptions https://t.co/vmw6kw0QRW via @ETHealthWorld Interesting to see a Bank making recommendations on health budgets. Hope government listens
Advertisement · Scroll to continue— healthiswealth (@sujakrao) January 27, 2025
Transitioning to the New Tax Regime: A Game-Changer?
SBI outlined three potential scenarios if the government transitions entirely to the New Tax Regime:
- Case 1: Simplified Exemptions with a 25% Peak Tax Rate
- Exemptions for healthcare and NPS remain at ₹25,000 and ₹50,000, with possible increases to ₹50,000 and ₹75,000, or ₹50,000 and ₹1 lakh.
- Peak tax rate for income over ₹15 lakh reduced to 25%.
- Revenue loss estimated between ₹74,000 crore and ₹1.08 lakh crore.
- Introduction of a flat 15% tax on bank deposits and an increased tax exemption for savings deposits to ₹20,000.
- Case 2: Retaining 30% Peak Tax Rate with Adjusted Slabs
- Income between ₹10 lakh and ₹15 lakh taxed at 15%.
- Healthcare and NPS exemptions remain as in Case 1.
- Estimated revenue loss ranges from ₹16,000 crore to ₹50,000 crore.
- Similar flat tax and savings deposit exemptions as in Case 1.
- Case 3: Tax Reductions Across All Income Brackets
- Peak tax rate reduced to 25%, with income between ₹10 lakh and ₹15 lakh taxed at 15%.
- Revenue loss estimated at ₹85,000 crore to ₹1.19 lakh crore.
- Same provisions for flat tax and savings deposit exemptions.
Implications of the Shift
The SBI’s proposals aim to enhance tax compliance, increase disposable income, and stimulate consumption. However, the government faces the challenge of balancing revenue losses—projected at up to ₹1.19 lakh crore—with economic growth objectives.
As the Finance Minister prepares to present Budget 2025, taxpayers and policymakers await clarity on whether the proposed transition to the New Tax Regime will be implemented. With rising demands for simpler processes and higher exemptions, Budget 2025 could mark a new chapter in India’s tax landscape.
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