Union Budget 2025: Finance Minister Nirmala Sitharaman will read out the inputs of Union Budget 2025 on February 1, 2025. The Budget is anticipated to include measures to cut income tax rates to boost consumption and provide relief to middle-class and salaried individuals. Last year, FM Sitharaman increased the standard deduction for salaried individuals to Rs 75,000 and revised tax slabs, claiming these changes would result in a net gain of Rs 17,500 for taxpayers.
Experts advocate that FM Sitharaman should introduce changes in the income tax slabs under the new tax regime in Budget 2025. This is because the government, since the announcement of the new tax regime in Budget 2020, has made changes in the new tax regime only. No changes have been made to the old tax regime.
Last week, SBI Research shared its pre-Budget report suggesting complete elimination of all exemptions under the Old Tax Regime and transition them to the new tax regime.
CA Dr Suresh Surana in a discussion with Business Today said the recent analysis provided by SBI Research offers a comprehensive evaluation of potential reforms to India’s income tax regime.
"The SBI suggestions focus on moving the entire taxpayer base to the New Tax Regime, eliminating exemptions (except for healthcare and NPS) while adjusting tax rates to balance revenue loss and stimulate consumption. This approach aligns with the goal of enhancing disposable income while maintaining fiscal prudence," Dr Surana said.
However, he added that removing most exemptions could adversely affect individuals who rely on traditional deductions for tax relief. Additionally, transitioning taxpayers entirely to the New Tax Regime may pose some operational challenges.
Tax cuts and New Tax Regime
SBI proposal: The highest income tax rate remains unchanged at 30% for income exceeding 15 lakhs. Meanwhile, tax rates are reduced to 15% for income ranging between Rs 10 lakhs and Rs 15 lakhs, with all exemptions except for healthcare and the National Pension Scheme (NPS) kept at Rs 25,000 and Rs 50,000, respectively.
These thresholds are raised to Rs 50,000 and Rs 75,000 in Scenario 1, and Rs 50,000 and Rs 1 lakh in Scenario 2. The government is anticipated to face revenue losses between Rs 16,000 crores and Rs 50,000 crores due to these changes. In addition, a flat 15% tax on bank deposits is suggested, which will be included in overall income and not tied to the highest income bracket. The tax exemption limit for Savings Account (SA) deposits will be increased to Rs 20,000.
This proposal is presented for review by both the Government and Consumers. Estimated revenue losses of Rs 50,000 crores, equivalent to 0.14% of GDP, are expected as a result.
Tax cut effect
Dr. Surana emphasized the importance of maintaining the highest income tax rate at 30% for income exceeding 15 lakhs as proposed by SBI. This move could potentially ease the burden on the middle class by lowering taxes for individuals earning between Rs.10 lakh and Rs. 15 lakh.
Additionally, tax rates for those in the income bracket of Rs. 10 lakhs to Rs. 15 lakhs have been reduced to 15%. It is worth noting that all exemptions, except for healthcare and the National Pension Scheme (NPS), have been kept at Rs 25,000 and Rs 50,000, respectively.
"The proposal focuses on providing relief to the middle class by reducing taxes for the Rs.10 lakh–Rs. 15 lakh income bracket. It maintains a progressive structure by retaining the 30% peak tax rate while rationalising rates for lower brackets. Additionally, the emphasis on healthcare, NPS, and savings deposits highlights a long-term strategy to promote financial discipline and encourage savings," he said.
Dr Surana said: "This approach retains the 30% peak tax rate while rationalising the middle-income bracket (Rs.10 lakh–Rs.15 lakh) by reducing the tax rate from 20% to 15%, striking a balance between revenue loss and increased disposable income for the middle class. It also enhances savings opportunities by raising healthcare and NPS exemptions, as outlined in Case 1. The revenue loss under this scenario is relatively modest, ranging from Rs. 16,000 crore to Rs. 50,000 crore. By targeting tax relief at middle-income taxpayers, who have higher marginal propensities to consume, this measure is likely to drive consumption and stimulate economic activity."
In addition, he stated that SBI Research recommends Case 2 as the optimal choice because it strikes a balance between reducing revenue loss and providing advantages for the income group ranging from Rs. 10 lakh to Rs. 15 lakh.
"The SBI Research advocates Case 2 as the ideal option due to its balance between minimising revenue loss and benefiting the Rs. 10 lakh–Rs.15 lakh income group, which drives consumption and economic growth. It strengthens social welfare through increased healthcare and NPS exemptions while simplifying the tax structure without disadvantaging any group," Dr Surana said.
Old Tax Regime vs New Tax Regime
The threshold limits for claiming exemption/deductions under the old income tax regime have seen minimal changes in the past decade, suggesting a gradual phasing out of the old system. Taxpayers who adhere to the traditional structure are optimistic about potential adjustments that take into account the increasing inflation and living expenses in India.
Sudhir Kaushik, CEO of Taxspanner.com, said: The new tax regime has already been made attractive for non-savers to boost consumption. Let the tax-savers also live their plans and not get into the trap of lower tax rates because future financial responsibilities remain and do not go away merely due to a new tax regime. Let the taxpayers and their advisors choose the regime that suits them best. This will truly be a more democratic approach instead of forcing the new tax regime on taxpayers because the number of taxpayers opting for each tax regime is significant. No need to discourage tax savers and disturb their future financial plans. Lower-income taxpayers have got sufficient tax benefits without tax saving investments, but those who can save should not be discouraged."