Budget 2025: How can FM Nirmala Sitharaman soothe middle-class taxpayers this time?

Budget expectations: On February 1, 2025, Union Budget will be presented by Finance Minister Nirmala Sitharaman at the Lok Sabha. Income taxpayers are expecting significant tax breaks. The taxpayers may expect some big changes as PM Narendra Modi and President Draupadi Murmu hinted at some major shakeup. 

Ahead of the Budget 2025, President Draupadi Murmu suggested that there could be significant tax relief for middle-class Indians in the upcoming budget. During her speech to Parliament to kick off the budget session, Murmu emphasized the importance of the middle class's aspirations in driving India's economic growth.

Prime Minister Modi expressed optimism that the Union Budget 2025 will stimulate India's economy, stating that he will pray for the well-being of the poor and middle class citizens to Goddess Lakshmi.
 
Addressed the media outside Parliament, PM Modi said: "Ahead of the Budget session, I bow down to Goddess Lakshmi, the goddess of wealth and prosperity... I pray that Goddess Lakshmi continues to bless the poor and middle class of our country. It is a matter of great pride that India has completed 75 years as a democratic nation."

What the Middle Class wants

1. Section 80C

Income taxpayers under the Old Tax Regime are anticipating substantial tax relief in Section 80C leading up to Budget 2025-26. Section 80C provides a total deduction limit of Rs 1.5 lakh for diverse investments including contributions to ELSS, NPS, home loan principal repayment, and other eligible options.

Santosh Joseph, Co-founder and CEO of Germinate Investor Services, suggested that the upcoming budget should consider implementing new tax incentives, comparable to those available under Section 80C. These incentives could potentially encompass investments in equity-linked savings schemes (ELSS) and insurance products. 

"Expanding these provisions to include new categories or increasing the limits could provide much-needed relief to taxpayers. An increase in the income tax slab levels or the introduction of new slabs could also offer targeted tax benefits for specific investments or savings, which would motivate people to save more and benefit from tax exemptions," Joseph added.

2. NPS taxation and contribution

Senior citizens rely heavily on NPS, pension plans, annuities, and other retirement-focused products to support themselves in their later years. Therefore, it is crucial that withdrawals from these investment vehicles remain completely exempt from taxes.

Currently, only employer contributions receive increased deductions. Introducing deductions for individual contributions would bolster long-term financial security, particularly for the gig economy workforce.

Prashant Tripathy, MD & CEO, Axis Max Life Insurance, said: "With Budget 2025 set to be presented tomorrow by the Hon'ble Finance Minister, we are optimistic about the introduction of initiatives aimed at enhancing the financial independence of senior citizens. A key step in this direction could be encouraging senior citizens to invest in the National Pension Scheme (NPS) or annuity/pension plans, ensuring a steady income stream. We expect the government to extend tax benefits for NPS contributions to insurance pension plans, along with making income received from these sources tax-free."    

3. Deductions for children's education

Section 80E allows for a deduction on the interest paid on an Education loan taken for higher studies, whether in India or abroad, without any maximum limit for claiming the deduction. In contrast, Section 80C permits a deduction of up to Rs.1,50,000 on tuition fees paid by individual taxpayers.

Under Section 80E of the Income Tax Act, individuals using the old tax regime can claim a deduction on the interest component of a loan specifically taken for higher education. However, this benefit can only be claimed for a maximum of 8 years or until the total interest amount is fully paid, whichever comes first.

Prof. Arvind Sahay, Director, MDI Gurgaon, said by simplifying the process for tax exemptions on scholarships, we can ensure that financial assistance goes directly to students without causing any additional tax burdens. Moreover, providing tax breaks on educational programs sponsored by employers could promote greater investment in developing skills, ultimately leading to a better alignment between workforce capabilities and industry demands.

He said: "Expanding the scope of education loan interest deductions under Section 80E can provide crucial relief to middle-class households, making higher education more attainable. A longer deduction period or increased exemption limits would alleviate the financial burden on students pursuing advanced degrees, particularly in high-cost fields such as management, medicine, and technology."

4. Loan repayment tenure

As of now, individuals are eligible to deduct the interest paid on educational loans for higher education for up to 8 years. Ahead of the Union Budget 2025-26, taxpayers are advocating for an extension of this repayment period.

Shreevats Jaipuria, Chair, PHDCCI Education Committee, said: "Interest on education loans is deductible under Section 80E from the year of the repayment. Maximum duration allowed for repayment is eight years, and it can be taken only for higher education of self, spouse, own child, or a child for whom the individual is a guardian. While there are set limits for unsecured loans, banks give loans of as high an amount as Rs 1.5-Rs 2 crore in select cases for study abroad against collateral. One area where some tweak is possible is the duration of repayment, which can be increased from eight to 15 years so that there is no untoward burden on the student immediately after entering the workforce."

5. Tax relief for home buyers

Compared to the new tax regime, the old tax regime provides greater benefits in terms of deductions for home loans. In contrast, the new tax regime only allows for interest deductions on home loans used for let-out or rented properties.

Kunal Savani, Partner, Cyril Amarchand Mangaldas, said: "The government may consider introducing new benefits for the construction and/or purchase of a new residential house, especially for first-time homebuyers, in order to provide a boost to the real estate sector and make housing more affordable for the common man. Deductions available for payment of home loan interests under Section 24(b) of the Income Tax Act, 1961 (“IT Act”) may also be increased from the current Rs 2 lakhs to Rs 4 lakhs. In case 100% tax benefit is not feasible, the Government may consider other incentives like obtaining funding at lower interest rates, etc."

Besides, homebuyers are optimistic about the upcoming Budget and are looking forward to a higher budget allocation for government initiatives such as the Pradhan Mantri Awas Yojana (PMAY-U). They are also hoping for an extension of the loan-linked subsidy to support first-time buyers. Simplifying the Goods and Services Tax (GST) framework is another key demand, as homebuyers currently face several uncertainties in this area.

Stamp duties are a major concern for homebuyers, especially in states where rates can reach up to 8-9 percent, significantly increasing the overall property cost. Homebuyers are anticipating more uniform and reduced stamp duty rates to be announced by the Finance Minister.

Additionally, homebuyers are seeking revisions to the tax deduction limits under Sections 80C and 24(b). Currently, individuals can avail deductions of Rs 1.5 lakh for home loan principal repayment and an exemption of Rs 2 lakh on interest repayment for self-occupied properties.

6. Additional income tax breaks

In order to promote the adoption of electric vehicles (EVs) in the country, taxpayers are eagerly anticipating the reintroduction of a deduction by FM Sitharaman in the upcoming budget. This deduction would allow taxpayers to claim up to Rs 1,50,000 on the interest portion of a loan used specifically to purchase an EV if the loan was sanctioned between January 2019 and March 2023.

Additionally, the Centre has implemented various schemes such as the Faster Adoption and Manufacturing of Electric Vehicles in India (FAME India) Schemes, the Production Linked Incentive (PLI) Scheme for Automobile and Auto Component Industry in India (PLI-Auto), LI Scheme for Advanced Chemistry Cell (ACC), PM Electric Drive Revolution in Innovative Vehicle Enhancement (PM E-DRIVE) Scheme, PM e-Bus Sewa-Payment Security Mechanism (PSM) Scheme, and the Scheme for Promotion of Manufacturing of Electric Passenger Cars in India (SPMEPCI) among others to bolster the sector.

7. Deductions under Old tax Regime

The old tax system provides approximately 70 exemptions and deductions for taxpayers, while the new tax system offers fewer exemptions and deductions in exchange for multiple income tax slabs and reduced income tax rates. Leading up to the Budget announcement, taxpayers are anticipating an increase in the home loan interest deduction under Section 24(b), currently limited to Rs 2 lakh, which would be advantageous for home loan borrowers. Furthermore, there is a possibility of an increase in the standard deduction for salaried employees, which currently stands at Rs 50,000, to assist employees in meeting their day-to-day expenses.

Sourabh Deorah, Co-founder & CEO, AdvantageClub.ai, said: "The Budget 2025 will be here soon, and we remain optimistic that some changes will come about to make the lives of salaried employees easier. One major thing we wish for is better deductions on taxes under Section 80D. One huge expectation is an enhancement in the limit for Section 80C, which is currently capped at Rs 1.5 lakh. Raising this would enable a larger amount of savings in PPF, EPF, and life insurance. Similarly, the Section 80D deduction of health and life insurance, which currently stands at Rs 25,000 and Rs 50,000 for senior citizens, can be widened as per contemporary needs of healthcare."