Every year, salaried individuals in India eagerly anticipate income tax relief from the government. In the upcoming Budget 2025 presentation scheduled on February 1, the middle class is placing their faith in FM Nirmala Sitharaman for potential relief as well.
Representatives from India's industry bodies and economists are advocating for a decrease in personal income tax rates from the Finance Minister. Sanjiv Puri, Chairman of the Confederation of Indian Industries (CII), emphasized the need for income tax relief to stimulate consumption in the country.
During a pre-budget meeting with Prime Minister Narendra Modi, experts discussed various strategies to address economic challenges. One of the key suggestions was the reduction of income tax rates, which could result in increased disposable income, higher savings rates, and a boost in spending on essential items. This, in turn, could help revive demand in sectors impacted by sluggish consumption.
“From a perspective of boosting consumption, we have suggested that there be some relief provided to income tax up to a Rs 20 lakh on the marginal income tax rate so that it boosts consumption, there is more disposable income and in turn also leads to buoyancy in revenues,” said Sanjiv Puri.
Ajinkya Gunjan Mishra, Tax Partner at S&R Associates, told India Today: “The last significant income tax relief for individual taxpayers was announced in the Union Budget for the financial year 2020-21, which introduced a new and optional personal income tax regime.”
He added, “The introduction of reduced tax rates under the optional regime has particularly benefited middle-income taxpayers who do not claim deductions or exemptions.”
What tax relief has govt offered in recent times
The Union Budget 2024 maintained the Old Tax Regime while making enhancements to the New Tax Regime to increase its acceptance. This included widening two income tax slabs and raising the standard deduction in the new regime from Rs 50,000 to Rs 75,000.
The standard deduction is a set amount deducted from taxable salary income to assist employees in managing common work-related expenses. India initially got rid of the standard deduction in 2005, which had previously allowed employees to deduct either Rs 30,000 or 40% of their salary, depending on income levels. It was reintroduced in Budget 2018 at Rs 40,000, and then increased to Rs 50,000 in the interim Budget 2019.
The Old Tax system has been kept as is, thus enabling taxpayers to still take advantage of a range of deductions and exemptions. These include deductions for loan repayments, insurance costs, tax-efficient investments, educational expenses, and medical bills.
In the 2023 Budget, Finance Minister Nirmala Sitharaman increased the standard deduction allowances. Under the new tax regime, individual taxpayers were eligible to claim Rs 50,000, with family pensioners able to deduct up to Rs 15,000. Salaried individuals earning Rs 15.5 lakh or above received a tax benefit of Rs 52,500.
In the 2022 Budget, Finance Minister Nirmala Sitharaman maintained the current personal income tax slabs and rates. Additionally, she announced a provision for tax deduction on employer's contribution up to 14% for state government employees. Furthermore, taxpayers will now have the ability to submit updated Income Tax Returns (ITR). Moreover, the tax deduction limit in the National Pension System (NPS) has been raised from 10% to 14% for state government employees.
In Union Budget 2021, the notable income tax relief was announced for individual taxpayers, which implemented the New Tax Regime. The optional regime presented lower tax rates, although taxpayers were required to forgo common exemptions and deductions, such as those found in Sections 80C and 80D. Mishra clarified that the main objective of this change was to simplify the tax system and offer support to middle-income earners. The implementation of reduced tax rates under the optional regime has particularly aided middle-income taxpayers who do not utilize deductions or exemptions.
Changes in capital gains tax regime
The Budget 2024 increased capital gains taxes on various capital assets, affecting short-term capital gain (STCG) and long-term capital gain (LTCG). In addition, there have been changes to the holding periods for these gains. This will have an impact on your mutual fund investments.
The tax rate for short-term capital gains on equity-related investments has been increased from 15% to 20%. Although the tax-free limit for long-term capital gains on equity-related investments has been raised from Rs. 1 lakh to Rs. 1.25 lakh, the elimination of indexation may negate this benefit for many taxpayers.
Additionally, the budget clarified the taxation of mutual funds, aligning them with the tax treatment of debt instruments. Mutual funds with over 65% of assets invested in debt and money market instruments were classified as debt funds and taxed accordingly.
After the Budget declaration, the Centre proposed significant relief for individuals who purchased houses before July 23, 2024. They are now given the option to choose between two tax rates for long-term capital gains (LTCG) tax.
According to the amendments made to the Finance Bill of 2024, individuals or Hindu Undivided Families (HUF) who bought houses before July 23, 2024, can calculate their taxes under the new scheme (12.5% without indexation) and the old scheme (20% with indexation) and pay the lower of the two.