Budget 2025-26: Govt might consider a review of income tax rates and slabs

Ahead of the Union Budget 2025-26, the government is deliberating a further review of income tax slabs to provide a boost to individual taxpayers and consumption demand, which has moderated in urban households, government sources said. 

According to sources, one of the options under consideration is to hike the income bracket from Rs 15 lakh on which the highest income tax slab of 30% kicks in. Experts and taxpayers have noted in the past that Rs 15 lakh annual income translates into about Rs 1 lakh monthly income after tax and deductions, which is often not adequate for a family of four living in a Tier-II or metro city.

Further, due to consistent high inflation, especially in food prices, as well as lower than anticipated wage hikes, urban households have seen their disposable incomes shrink, that is putting stress on urban consumption expenditure.

Industry chambers including Confederation of India Industry (CII) and Assocham have also suggested a review of the income tax slabs and the marginal rate. 

“The gap between the highest marginal rate for individuals at 42.74% and the normal corporate tax rate at 25.17%, is high. Further, inflation has reduced the buying power of lower- and middle-income earners. The Budget could consider reducing marginal tax rates for personal income upto Rs 20 lakh per annum. This would help trigger the virtuous cycle of consumption, higher growth and higher tax revenue,” CII had said in its pre-Budget memorandum.
 
Industry chamber Assocham has also called for a reduction in personal income tax rates in the Budget. In a note to Finance Minister Nirmala Sitharaman, it has highlighted that corporate tax rates have decreased over the years, leading to a widening gap between personal and corporate taxes. According to Assocham, the highest marginal rate for individuals has now risen to 42.74% in the highest slab and 39% in the new tax regime, compared to the regular corporate tax rate of 25.17%.

Anand Bathiya, President, Bombay Chartered Accountants' Society (BCAS) noted that in recent years, tax rates for corporates have reduced. However, the rates of tax for non-corporates, such as LLPs, partnership firms and AOPs, continue to be high. “Similarly, the tax rates for individuals earning high income are also exceedingly high. Hence, BCAS proposes to lower individual tax rates to a maximum of 30% (including surcharge and cess),” he said.

Sources, however, indicated that consultations were still underway, and nothing has been finalised yet. Revenue considerations also have to be considered. Officials note that while there is a substantial reduction of tax burden on people earning income less than Rs 20 lakh, that is the middle class group, people in the Rs 10 lakh to Rs 20 lakh income bracket still file a substantial number of tax returns and pay significant tax. Nearly 89 lakh income tax returns in 2023-24 were filed by people in this tax bracket while the highest number of returns were filed by people in the Rs 2.5 lakh to Rs 5 lakh income bracket at 2.86 crore.

Further, relief to income taxpayers was also given in the Union Budget 2024-25 and the Finance Minister had revised the tax slabs under the new income tax regime.