The State Bank of India (SBI) has proposed mandating the new tax regime for all taxpayers while sparing key social security exemptions, per its Prelude to Union Budget 2025-26 report. The plan seeks to simplify India’s labyrinthine tax code but risks Rs 50,000 crore in annual revenue losses.
Core recommendations:
Universal New Regime
Shift all 8.2 crore taxpayers to the simplified system, scrapping the old regime’s ₹4.5 lakh average exemptions per filer.
Exemption carveouts
Retain and enhance deductions for:
NPS contributions (raised to Rs 1 lakh/year from Rs 50,000).
Medical insurance (Rs 50,000 exemption, up from Rs 25,000).
Slab rationalisation:
Reduce the 20% rate to 15% for Rs 10-15 lakh incomes.
Retain 30% peak rate for earnings above Rs 15 lakh.
Revenue Impact Analysis:
Case 1: Slash peak rate to 25% → ₹74,000 Cr–₹1.08 Lakh Cr loss.
Case 2: Keep 30% peak, cut ₹10-15L rate to 15% → ₹16,000 Cr–₹50,000 Cr loss (SBI’s pick).
Case 3: Hybrid approach → ₹85,000 Cr–₹1.19 Lakh Cr loss.
The report argues Case 2 balances fiscal prudence and consumer gains.
Retaining the 30% top rate limits revenue bleed to 0.14% of GDP while offering middle-income earners ₹34,500–₹1.15 lakh annual savings.
Trade-offs
“Rationalising rates with least revenue loss is critical to fund India’s $6.4 trillion infrastructure needs,” the report states, noting the new regime could boost compliance by reducing litigation-prone exemptions.
The proposals face headwinds. States like Karnataka (11% revenue spent on welfare schemes) and Maharashtra (9%) may resist central tax cuts amid their own fiscal strains. Direct taxes, now 58% of collections – their highest since 2010 – leave limited room for experimentation.
SBI acknowledges risks: “Transition shock for 1.5 crore taxpayers clinging to old exemptions.” But it frames the overhaul as inevitable: “A simplified tax architecture is non-negotiable for $7 trillion GDP ambitions.”