Union Budget 2025: Finance Minister Nirmala Sitharaman is set to unveil the Union Budget 2025 in less than 24 hours, marking the first full year Budget of Modi 3.0. The last Union Budget in July 2024 was disappointing for salaried taxpayers, particularly those under the Old Tax Regime. In the upcoming Budget, the salaried class is eagerly anticipating some tax relief to ease their growing financial burdens.
Currently, taxpayers can choose between the Old and New Tax Regimes. The Old Tax Regime remains popular due to its various deductions and exemptions, including those in Sections 80C and 80D of the Income Tax Act. For instance, Section 80C allows deductions of up to Rs 1.5 lakh on investments in life insurance premiums, home loan repayments, and savings schemes like the Public Provident Fund (PPF).
Alternatively, the 2020 Union Budget introduced the New Tax Regime, featuring reduced tax rates and fewer exemptions and deductions than the previous system. The New Tax Regime has since become the default option following the Union Budget 2023.
It is anticipated by experts that the old tax regime may gradually be phased out in favour of a unified and simplified tax structure.
Top expectations: Individual taxes
> Increase the exemption threshold from Rs 3 lakh to Rs 5 lakh under both tax regimes to provide relief for middle-class taxpayers. > Implement a new tax slab of 25% for income ranging from Rs 15 lakh to Rs 20 lakh. > Adjust the current 30% slab to begin at Rs 20 lakh instead of Rs 15 lakh. > Include deductions in the revised tax structure, such as allowing Section 80C deductions (up to Rs 2 lakh) for savings like life insurance and PF. > Increase Section 80D deductions for health insurance to Rs 1 lakh. > Reinstate deductions for House Rent Allowance (HRA) under Section 10(13A) for salaried individuals. > Additional tax relief for senior citizens and super senior citizens.
Let's see the tax slabs under the Old Tax Regime and New Tax Regime.
Old Tax Regime
The old tax system remains popular with taxpayers who utilize deductions for investments, housing loans, and health insurance.
The tax slabs for individuals under the age of 60 are as follows:
> Up to Rs 2.5 lakh: 0% > Rs 2.5 lakh to Rs 5 lakh: 5% > Rs 5 lakh to Rs 10 lakh: 20% > Above Rs 10 lakh: 30%
Under the old tax system, deductions include:
Section 80C: Up to Rs 1.5 lakh for investments in PF, ELSS, LIC premiums, etc. Section 80D: Up to Rs 25,000 for health insurance premiums (Rs 50,000 for senior citizens). HRA: Available for salaried individuals who pay rent. Section 24(b): Up to Rs 2 lakh for home loan interest.
Taxpayers under the Old Tax Regime are anticipating adjustments to the tax slabs that have remained unchanged for several years. Under the previous tax system, taxpayers benefited from substantial deductions such as house rent allowance, investment linked deduction (Section 80C), home loan interest (Section 24(b)), health insurance premiums (Section 80D), and NPS contributions (80CCD). Nevertheless, these deductions are not applicable in the updated tax regime.
"The old tax regime may be more attractive than the new regime if the taxpayer is eligible and can claim higher tax benefits, deductions, and exemptions available under it. However, it is important to note that while the old tax regime offers flexibility for deductions, it involves significant time and cost for effective tax planning, filing, and compliance," said SR Patnaik, Partner (Head-Taxation), Cyril Amarchand Mangaldas.
New Tax Regime
The new tax system offers a simplified structure with reduced rates, but it does not allow for deductions, which many people use to lower their taxable income. In the 2024 Budget, changes were made to make the new tax regime more attractive compared to the previous one. The standard deduction limit was increased from Rs 50,000 to Rs 75,000. The Finance Minister also raised the tax benefit on employers' contribution to employees' National Pension System (NPS) from 10% to 14%. Additionally, adjustments were made to the tax slabs, resulting in a tax savings of Rs 17,500 for salaried individuals.
Under the New Tax Regime:
Up to Rs 3 lakh: NIL Rs 3 lakh to Rs 6 lakh: 5% Rs 6 lakh to Rs 9 lakh: 10% Rs 9 lakh to Rs 12 lakh: 15% Rs 12 lakh to Rs 15 lakh: 20% Above Rs 15 lakh: 30%
"With the introduction of the New Tax Regime in recent years, in the 2024 budget, the Hon’ble Finance Minister (FM) announced the allowability of an increased standard deduction of Rs 75,000 per annum for those who opt for New Tax Regime as against INR 50,000 per annum who opt for Old Tax Regime. Owing to the inflation and increase in prices in both transport and medical since FY 2018-19 since the time standard deduction was reintroduced, the Hon’ble FM should look at bringing in parity for those opting for either the Old or the New Tax Regime and increase the standard deduction to a minimum of INR 1.20 lakhs a year. This would seem practical as any salaried taxpayer would be incurring INR 10,000 a month / INR 1.20 lakhs a year collectively towards transport and medical expenses," said Santhosh Sivaraj, Partner, Global Employer Services, Tax & Regulatory Services, BDO India.
Deepashree Shetty, Partner, Global Employer Services, Tax & Regulatory Services, BDO India, "Many taxpayers find themselves confused between the two regimes, often reassessing their choice not only during the year but also while filing their tax returns. In light of these complexities, the upcoming Budget should focus on simplifying the tax structure for individual taxpayers by consolidating the current dual regimes into a single, cohesive tax framework. While this shift may take time, it is anticipated that the OTR may eventually be phased out, with its abolition ideally scheduled for FY 2026-27 to provide ample time for taxpayers, employers, and financial institutions to adjust."