World
India
As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2025-26 on February 1, 2025, taxpayers and experts are eagerly awaiting announcements aimed at easing financial burdens on lower and middle-income groups. With inflation continuing to challenge household budgets, significant tax relief measures are anticipated.
Tax Reforms in Budget 2024
The previous Union Budget 2024-25 introduced key benefits for taxpayers under the New Tax Regime, including:
- Increased Standard Deduction Limit: A move designed to reduce taxable income for salaried individuals.
- Revised Tax Slabs: Providing lower rates for specific income brackets.
- Family Pension Deduction: Expanded to provide relief to pensioners.
These changes simplified tax compliance and aimed to encourage more taxpayers to transition to the New Tax Regime.
Key Features of the New Tax Regime
The New Tax Regime, introduced as an alternative to the older structure, emphasizes simplicity:
- Higher Tax-Free Income Threshold: The tax-free income limit is currently ₹7.75 lakh, providing relief to a significant portion of taxpayers.
- Minimal Deductions and Exemptions: Eliminates the need for extensive documentation to claim benefits.
- Simplified Filing Process: Streamlined procedures for taxpayers.
For the assessment year 2024-25, 72% of the 9 crore income tax returns filed were under the New Tax Regime. Among these:
- Over 70% reported taxable incomes of ₹5 lakh or less, resulting in zero tax liability.
- 88% of taxpayers earned less than ₹10 lakh, and 94% earned below ₹15 lakh, placing most in no-tax or low-tax brackets.
Raising Expectations: Proposed Reforms in Budget 2025
Experts and analysts have proposed several measures to make the New Tax Regime more attractive and beneficial:
1. Increasing the Tax Exemption Limit
There is growing demand to raise the exemption limit to ₹10 lakh, allowing individuals earning up to this amount to pay no income tax.
“The proposal to exempt income tax up to ₹10 lakh will surely scale up liquidity in the hands of middle-class salaried individuals,” says Vimal Nadar, Senior Director, Research, Colliers India.
2. Introducing a New Tax Slab
To address middle-income earners, experts suggest a 25% tax slab for incomes between ₹15 lakh and ₹20 lakh. This adjustment could increase disposable income and boost consumer spending.
3. Revising Deductions and Standard Benefits
Tax consultant Priyank Shah, Co-Founder & CEO of The Financialist, highlights the importance of reducing the tax burden for incomes below ₹15 lakh.
“Raising the basic exemption limit from ₹3 lakh to ₹5 lakh would allow more individuals to retain a larger portion of their earnings tax-free,” he says.
Shah also advocates for changes to the standard deduction and pension deductions to provide further financial relief and encourage taxpayers to shift to the New Tax Regime.
Experts’ Opinions on Rationalizing Tax Framework
The broader tax framework requires significant reform, according to analysts.
- Rony Antony, Partner & Leader, Corporate Tax (South) at BDO India, stresses the need for structural changes, remarking:
“The rationalisation of income tax is long overdue. While efforts were made with a proposed Direct Tax Code, progress has stalled.”
- Krishna Killa, Founder of Ironclad Asset Management, anticipates incremental changes, noting:
“Successive budgets have been progressively increasing slabs to boost disposable income. This trend is likely to continue in Budget 2025.”
Killa recalls that Budget 2024 increased thresholds for the 5% and 10% tax slabs by ₹1 lakh each, and similar adjustments are expected this year.
Impact Of Union Budget on Economic Growth
The potential move to raise the tax-free income threshold to ₹10 lakh is widely viewed as a measure to boost consumer spending and stimulate the economy. Higher disposable incomes could address lagging rural demand, which has been a concern in recent years.
Additionally, soft nudges, such as increasing limits on deductions for pensions, leave encashment, and standard benefits, are expected to encourage more taxpayers to transition to the New Tax Regime.
Will Budget 2025 Deliver Major Tax Relief?
As the government focuses on balancing economic growth and fiscal responsibility, taxpayers await clarity on whether their expectations will be met. Measures like increasing tax exemptions, rationalizing slabs, and providing targeted relief could play a crucial role in shaping public sentiment and boosting the country’s economic momentum.
For now, all eyes are on February 1, when Finance Minister Sitharaman will unveil the Union Budget 2025-26. Will it bring much-needed relief to India’s middle class? Only time will tell.
