Union Budget 2025: The upcoming Budget presentation by FM Nirmala Sitharaman is just a week away. In the recent past, the new tax regime has been the main source of relief for individuals in the lower to middle-income bracket. For the higher middle class and high net worth individuals, Budget 2023 provided significant relief by implementing a cap on the maximum rate of surcharge.
In the last Budget 2024-25, the finance minister introduced several measures to make the new tax regime more appealing compared to the old regime. The standard deduction limit was raised from Rs 50,000 to Rs 75,000 under the new regime, resulting in savings of Rs 17,500 in taxes for salaried individuals.
However, those opting for the New Tax Regime still have a long list of desired changes as it lacks the many exemptions and deductions offered by the Old Tax Regime.
1. Home Loan under New Tax Regime
Many salaried taxpayers have chosen to switch to the New Tax Regime for filing taxes, but some continue to follow the old regime, primarily because of the advantage of home loan deductions. Those who stick to the old regime can avail a deduction of up to Rs 2 lakh for home loan interest on a self-occupied property, a benefit not offered in the New Tax Regime.
In the New Regime, there are certain concessions for let-out properties. For instance, there is no cap on the deduction of home loan interest from taxable rental income as per section 24 of the Income-tax Act. However, the interest on the loan often exceeds the rental income, leading to a loss for the property owner. Unfortunately, this loss cannot be offset against income from other sources or carried forward in the new tax regime.
Both home loan borrowers and industry experts are optimistic that Finance Minister Nirmala Sitharaman will address their longstanding demands for enhanced tax benefits.
Under Section 24 of the Income-tax Act, 1961 (also known as the 'IT Act'), individuals are currently able to avail a deduction of up to Rs. 2 lakh for interest on home loans for self-occupied property. It is important to note that this deduction is applicable only under the old tax regime.
It should be noted that taxpayers opting for the new tax regime as per Section 115BAC are not entitled to this deduction.
CA (Dr.) Suresh Surana said: “Under the current framework, Section 24 of the Income-tax Act, 1961 permits a deduction of up to Rs 2 lakh for interest on home loans for self-occupied property, but this benefit is only available under the old tax regime. Taxpayers opting for the default new tax regime under Section 115BAC are unable to claim this deduction. Furthermore, losses under the head ‘income from house property’ cannot be set off against other income or carried forward for future adjustment under the new regime.”
As per Surana, if the government allows a deduction for home loan interest of up to Rs 2 lakh under the New Tax Regime, it would allow the offsetting of house property losses against other income and the carrying forward of unabsorbed losses for a period of 8 years. These measures are expected to offer significant relief, promote home ownership, and support investments in the real estate sector.
2. Expand deductions under New Tax Regime
The discussion on the old versus new tax regime is back with the Union Budget 2025, emphasizing the importance of customising financial planning strategies. The exemptions under the old regime cater to individuals who emphasize savings, whereas the simplified framework of the new regime is attractive to taxpayers looking for flexibility and reduced upfront deductions.
In order to promote savings, measures should be implemented to encourage individuals to save more. The new tax system is gradually re-introducing deductions, which is a step in the right direction. However, it is recommended that the list of deductions be expanded in a user-friendly manner. A practical approach would be to introduce a flat 30% deduction on gross income, capped at Rs 15 lakh.
3. Modify tax slabs
The new tax regime currently exempts income up to Rs 7.75 lakh from tax. As suggested by Adhil Shetty, CEO of BankBazaar.com, increasing this threshold to Rs 10 lakh would offer significant relief, as tax-free income is not affected by tax slabs.
For instance, if your income falls between Rs 5 lakh and Rs 7 lakh, you are subject to a 5% tax of Rs 10,000. However, this amount is waived as a rebate if your taxable income remains below Rs 7 lakh. On the contrary, if your income surpasses Rs 7 lakh, the full tax is applicable without any rebates.
Individuals earning above Rs 15 lakh have not experienced any changes in their tax rates since 2020, and they are ineligible for rebates. Although Rs 15 lakh per year may appear to be a substantial income for urban salaried individuals, increasing costs such as rent, hefty home loan EMIs, healthcare expenses for elderly family members, and rising school fees often leave little room for savings. It is essential to provide these taxpayers with relief through broader and fairer tax brackets.