In the July 2024 Budget, Finance Minister Nirmala Sitharaman expanded the income tax exemption slab and raised the standard deduction for all taxpayers. This adjustment was intended to allocate more funds for consumption purposes. Ahead of the Budget for 2025-26, experts are now expecting a host of things for the finance minister, including the continuation of the Old Tax Regime, simplification of the capital gains tax regime, and others.
During the 2024-25 Union Budget, Finance Minister Nirmala Sitharaman announced significant modifications to the existing income tax structure, including:
> Adjusting income tax slabs to provide relief for individuals earning up to Rs 10 lakh. > Raising the standard deduction for salaried individuals and pensioners from Rs 50,000 to Rs 75,000. > Increasing the standard deduction for family pensioners from Rs 15,000 to Rs 25,000. > Enhancing the deduction for employer's NPS contribution for private sector employees from 10% to 14%.
According to a report from Reuters, the Central government led by Narendra Modi is contemplating a reduction in income tax for individuals earning up to Rs 15 lakh per year. This measure is expected to benefit a large number of urban taxpayers.
The report, based on information from government sources, suggests that the forthcoming Union Budget for the year 2025-26 may offer tax relief to the middle class, thereby stimulating consumption.
Additionally, it is mentioned that this move could potentially benefit numerous individuals if they choose to adopt the 2020 tax system, which eliminates exemptions such as those related to housing rentals.
In the current tax system, income ranging from Rs 3 lakh to Rs 15 lakh is subject to a tax rate of 5-20%, with earnings above that threshold taxed at 30%. However, under the New Tax Regime, income up to Rs 3 lakh is exempt from taxation, while income in the Rs 3-7 lakh bracket is taxed at 5%, the Rs 7-10 lakh bracket at 10%, the Rs 10-12 lakh bracket at 15%, the Rs 12-15 lakh bracket at 20%, and any income exceeding Rs 15 lakh at 30%.
Under the Old Tax Regime, tax rates are higher but there are several exemptions and deductions available. It includes tax slabs ranging from 2.5% to 30% based on income. The Old Tax Regime slabs are income under 2.5 lakh: Nil; between 2.5 lakh and 5 lakh: 5 per cent; between Rs 5 lakh and Rs 10 lakh: 20 per cent; income above Rs 10 lakh: 30 per cent.
What experts are expecting from FM Sitharaman
Old Tax Regime: Last year, there was a buzz that the NDA government may completely remove the Old Tax Regime. While the new regime features broader tax slabs and reduced rates, it provides limited deductions and exemptions. Taxpayers who have made long-term financial plans based on the existing tax benefits stand to lose under the new system.
The Old Tax Regime incentivises savings by offering a range of deductions and exemptions, including those available under Section 80TTB for senior citizens. Conversely, the New Tax Regime streamlines the tax filing process with lower rates, especially benefiting individuals in lower income brackets, but with fewer opportunities for deductions and exemptions.
There is a growing concern that the government wants to do away with the Old Tax Regime altogether. While the new regime has wider tax slabs and lower rates, there are very few deductions and exemptions. The old regime should continue as before and taxpayers should be free to make a choice.
Relief for TDS payers: Salaried individuals in India are currently required to file their income tax returns (ITR) even if Tax Deducted at Source (TDS) has been deducted from their salary. This requirement adds an extra layer of compliance for employees, especially when there are no additional incomes or complex deductions involved.
In contrast, many developed countries, such as the United Kingdom, do not require employees to file tax returns if their employer has already deducted the necessary tax from their salary. This practice reduces the administrative burden on both employees and the tax department, making the process more efficient.
There is a growing call for the Indian Budget to exempt employees from filing ITR if TDS has already been deducted. Implementing such a measure would streamline compliance for millions of salaried taxpayers, saving time and resources for both individuals and the tax authorities.
Capital gains tax simplification: In 2024, the NDA government announced revisions in the capital gains taxation rules effective from the financial year 2024-25. These changes aim to simplify the capital gains taxation system. The updated capital gains taxation regime is outlined as follows:
> Short-term capital gains on equity and equity-oriented mutual funds will now be subject to a 20% tax rate, which represents an increase of 5% from the previous rate of 15%.
> Short-term capital gains derived from other assets, including real estate, gold, and other financial instruments, will be taxed according to the applicable income tax slabs.
> Long-term capital gains on all assets, whether financial or non-financial, will be taxed at a rate of 12.5%. This new system eliminates the differentiation in LTCG tax rates for various assets, which was prevalent under the previous regime.
> LTCG from equity and equity-oriented mutual funds are now eligible for tax exemption up to Rs 1.25 lakh per financial year, compared to the previous limit of Rs 1 lakh.
> The indexation benefit for LTCG from the sale of house property has been partially removed. Individuals now have the option to choose between two tax calculation methods for LTCG from the sale of a house purchased on or before July 22, 2024: (a) Tax calculated on LTCG with indexation at a 20% tax rate or (b) Tax calculated on LTCG with no indexation at a 12.5% tax rate. For houses purchased on or after July 23, 2024, the LTCG from the sale of the property will be taxed at 12.5% without the indexation benefit.
Experts have said that the government can further simplify the capital gains tax structure by aligning tax rates for various sub-asset classes. This could mean setting international equities equal to domestic equities, debt funds equal to gold funds, and gold funds equal to gold ETFs.