Budget 2025 income tax expectations: The Finance Minister Sitharaman took a progressive move towards simplification and a shift away from a disproportionately heavy tax exemption regime by announcing a new income tax regime in India’s Union Budget 2020. This cleared the path for the majority of the exemptions and deductions that were previously available under the previous income tax regime, taxpayers will pay income tax at a lower slab rate.
As an alternative to the traditional tax computation method, this is burdened with numerous internal tax exemption computations and, consequently, the complexity that also result in litigation, this trade-off was meant to offer a clear and simple tax calculation process.
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The new income tax structure was not widely adopted by taxpayers over the first few years. As a result, the new income tax regime was made the “default” tax regime, with effect from the Financial Year (FY) 2023–2024.
Approximately 72% of taxpayers opted the new income tax regime, according to PIB figures. Of the 7.28 crore tax returns filed for Assessment Year (AY) 2024–2025, 5.27 crore were filed under the new income tax regime. This change has been accelerated by the increase in the Standard Deduction against salary income from Rs 50,000 to Rs 75,000 starting in FY 2023–2024. The remaining 28%, on the other hand, continued to take use of numerous exemptions and deductions for things like rent payments, interest and principal payments on home loans, Mediclaim, life insurance premiums, retirement corpus, etc., making the previous income tax regime popular.
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Over the past decade, the threshold restrictions for claiming exemptions or deductions under the previous income tax regime have essentially stayed the same, suggesting that the previous regime is naturally coming to an end. The previous structure is still preferred by taxpayers who hope for changes that at least take into account India’s growing inflation and living expenses. They anticipate the following from the FM:
- The basic exemption limit has been raised from Rs 250,000 to at least Rs 300,000.
- Enhanced Standard Deduction: To match the deduction of Rs 75,000 under the new income tax regime, the standard deduction against salary income is increased.
- Increasing housing loan interest deduction: Remove the present Rs 200,000 cap on housing loan interest (for both self-occupied and rental properties) and allow up to Rs 300,000 in deductions under Income from House Property.
- Section 80C and Section 80D Limits Increased: Section 80C’s limit should be raised to Rs 200,000, and Section 80D’s limit should be raised from Rs 25,000 to Rs 40,000 (Rs 50,000 to Rs 75,000 for senior people).
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Although it is commonly known that the new income tax regime is a simpler tax system that does not offer tax exemptions or deductions, the following requirements must be met in order for the remaining 28% of taxpayers who filed tax returns under the previous income tax regime to switch to the new regime:
- Tax rates will be lowered from 20% to 15% for income between Rs. 1200000 and Rs. 1500000, from 30% to 20% for income between Rs. 1500000 and Rs. 2000000, and 30% for income exceeding Rs. 2000000 every year. Taxpayers with middle-class and salaried incomes may benefit greatly from this, which could increase consumer spending, a key factor in economic expansion.
- Enhance the standard deduction from Rs 75,000 to Rs 100,000 in order to cover unavoidable professional costs. There are also very few alternative tax benefits available.
- Employee contribution deduction for the National Pension Scheme (NPS): extending the Rs 50,000 deduction under section 80CCD(IB) in order to level the playing field between the previous and current income tax regimes (which 72% of taxpayers chose). This would promote NPS as opposed to Provident Fund and stimulate investing to establish retirement corpus, hence boosting financial security and well-being.
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As a result of better governance, the income tax agency has recently actively examined fraudulent filings for exemptions and disproportionate refunds. The government is likely to enact stronger restrictions in recognition of the potential for abuse under the previous income tax system, which might pave the way for a phase-out of the system over time. The government’s deployment and wise usage of I TBA 2.0, an advanced administration platform with A1 support, may be beneficial.
The new income tax regime serves as a prelude to the long-awaited New Income Tax Bill, giving taxpayers a better idea of how our tax system will develop in the future. Economic development, easier compliance, and more government revenue all of which promote equitable resource distribution—all depend on a clear and effective tax system.
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