Budget expectations: Leading up to Budget 2025, salaried taxpayers are eagerly anticipating the possibility of receiving additional tax relief to help alleviate the financial burden imposed by their salary incomes. In the previous Budget 2024, Finance Minister Nirmala Sitharaman raised the standard deduction for salaried employees and pensioners choosing the new tax regime to Rs 75,000 per year. However, individuals under the old regime continued to receive a standard deduction of Rs 50,000. In anticipation of Budget 2025, taxpayers are expressing their desire for a higher standard deduction, echoing the sentiment of "DIL MAANGE MORE".
As the Finance Minister prepares to deliver the budget speech on February 1, 2025, experts have suggested many changes, including new tax slabs, increasing the standard deduction limit to Rs 1.2 lakh for both the old and new tax regimes.
25% personal tax slab
The implementation of the new tax regime in 2020 set the stage for streamlining the tax system by reducing rates and eliminating certain deductions and exemptions. The Government has been focused on promoting the New Tax Regime, with significant changes in recent Budgets specifically targeted towards individuals opting for this regime. In fact, approximately 72% of taxpayers chose the new tax regime when filing their tax returns for the fiscal year 2023-2024.
Recent reports suggest that the upcoming Union Budget 2025-2026 may bring about major changes, including the possibility of exempting annual incomes up to Rs 10 lakh from taxation and introducing a new 25% tax bracket for incomes ranging from Rs 15 lakh to Rs 20 lakh.
It was reported that the government is exploring two options for potential tax reforms. The first option involves making annual income up to Rs 10 lakh tax-exempt, while the second option includes introducing a new tax bracket of 25 per cent for income falling between Rs 15 lakh and Rs 20 lakh. Currently, income exceeding Rs 15 lakh is taxed at a rate of 30 per cent.
The government is considering implementing both measures, provided that the Budget permits. This could involve making income up to Rs 10 lakh tax-free and introducing a new tax slab for income between Rs 15 lakh and Rs 20 lakh at a rate of 25 per cent.
Currently, individuals earning up to Rs 7.75 lakh are exempt from paying taxes thanks to the Rs 75,000 standard deduction. Akhilesh Ranjan, a PwC advisor and former CBDT member, suggested that the government should consider introducing a 25% tax slab for those earning between Rs 15 lakh and Rs 20 lakh. This could boost consumer spending as it would provide these taxpayers with more disposable income to spend on items like refrigerators and televisions.
Basic exemption limit
Taxpayers may see an increase in the basic exemption limit from Rs 3 lakh to Rs 3.50 lakh. This adjustment could provide individuals with a welcomed boost to their disposable income, subsequently boosting consumption levels.
According to tax professionals, reducing tax rates for middle-class individuals is expected to boost disposable income, resulting in higher consumption and economic expansion. At present:
In the old tax system, earnings exceeding Rs 10 lakh annually were taxed at a rate of 30%. In the current tax system, income above Rs 15 lakh annually is also subject to a 30% tax rate.
The suggested adjustments in tax policy could deliver essential financial relief to households, potentially stimulating greater expenditures and fostering economic resilience.
Expected deductions under New Tax Regime
In the new tax regime, there are only a few deductions available, and among them, the deduction for employer's contribution to the NPS is significant. The deduction cap has recently been raised from 10% to 14% in the previous year's budget. Unfortunately, there is no deduction allowed for an individual's contribution to NPS, which was previously allowed up to Rs 50,000 under the old tax regime. It would be beneficial for non-salaried individual taxpayers and would further encourage NPS participation if the Government were to consider extending this benefit to the new tax regime.
Tax Rebates under Section 87A
Currently, resident taxpayers can receive a full tax rebate under Section 87A on income up to Rs. 7 lakh. There is a proposal to increase this income limit to Rs. 8 lakh to further benefit the lower income group. The 87A rebate is applicable to taxpayers with income up to Rs. 5 lakh under the old tax regime or up to Rs. 7 lakh in the new tax regime. Eligible taxpayers under Section 87A can claim a tax rebate of up to Rs. 12,500 or Rs. 25,000, effectively reducing their total tax liability to zero.
House Property Deduction
Taxpayers can avail of a deduction of up to Rs 2 lakh on housing loan interest if the property is purchased within 5 years from the end of the financial year in which the loan was taken. An individual who took out a loan in September 2024 must acquire property by March 31, 2030, under current income tax laws in order to claim a deduction of Rs 2 lakh on interest paid on house property. Due to escalating prices and project delays, the Government may extend this deadline to 7 years and increase the deduction by Rs. 50,000.
A significant number of salaried individuals still choose the Old tax regime over the new one, mainly because of their housing loans. Nevertheless, the current restriction of Rs. 200,000 on mitigating losses from house property is seen as a hindrance. It is suggested that the Government review and eliminate this cap, allowing losses from house property to be offset based on actual figures, just like in the period before the financial year 2017-18.