Budget 2025: Will FM Sitharaman remove all exemptions under Old Tax Regime? SBI Research shares possibilities

The Centre may eliminate all exemptions under the Old Tax Regime and transition them to the new tax regime, a report by SBI Research released ahead of Finance Minister Nirmala Sitharaman's budget speech on February 1, 2025, stated. The report recommends increasing the National Pension System (NPS) limit from Rs 50,000 to Rs 1 lakh and raising the medical insurance exemption under section 80D to Rs 50,000 from Rs 25,000.

Additionally, SBI Research proposes lowering the tax rate to 15% for the income range of Rs 10-15 lakh and implementing a flat 15% tax rate on all bank deposits.

"We estimate GoI can ensure better tax compliance and bolster consumption through enhancing disposable income, by moving all and one under the New Tax regime," Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said in the report.

It is possible that implementing such a measure could result in a slight decrease in tax revenue for the government.

Changes proposed by SBI Research

The report presents several tax-relief measures for the government to consider in the upcoming budget:

• Consolidate all exemptions under the new tax regime while increasing the NPS limit from Rs 50,000 to Rs 1 lakh and raising the medical insurance exemption to Rs 50,000 from Rs 25,000.
• Maintain the peak tax rate at 30% for income exceeding Rs 15 lakh, but decrease the rate to 15% from 20% for income in the Rs 10-15 lakh bracket.
• Implement a flat 15% tax on bank deposits across all maturity periods. This income should be added to other earnings and separated from the highest income bracket.
• Raise the tax exemption limit for savings account deposits to Rs 20,000.
• SBI research suggested that this proposal could result in a revenue loss of Rs 50,000 crores, equivalent to 0.14% of the GDP.

As Budget 2025 approaches, the government has been urged before to lower tax rates and broaden the tax exemptions under the new regime.

Old Tax Regime possibilities

There have been no official announcements regarding the abolition of the old tax regime by the government. However, ongoing discussions have been held regarding its future. The new tax regime, which was introduced in the 2020 Union Budget, offers lower tax rates without the exemptions and deductions that were available under the previous system.

Despite the increasing popularity of the new tax regime due to its simplicity, many taxpayers still prefer the old system because of the various deductions and exemptions it offers, such as those under Sections 80C and 80D.

Vivek Jalan, Partner at Tax Connect Advisory Services LLP, said eliminating the Old Tax Regime completely and streamlining income tax slabs in the New Tax Regime represents a sensible progression.

“Today, under the New Tax Regime, income tax has become much simpler. With an exemption limit of Rs 7 lakhs, taxpayers pay zero tax at the same income level where they were previously taxed. As the Income Tax Act undergoes a comprehensive review on February 1, 2025, the government should consider making the New Regime the sole tax system,” Jalan said.

He added it is crucial for the government to consider the impact of the approximately 6% annual inflation rate on the purchasing power of money. One potential solution to address this issue is by reducing the tax rate in the New Regime. It is anticipated that the basic exemption or rebate limit could be raised to Rs 9 lakhs, thereby putting more money into the pockets of the middle class. Nevertheless, taxpayers earning over Rs 15 lakh might face financial challenges if they transition to the New Regime. To tackle this issue, the government could introduce a new tax slab for incomes between Rs 15 lakh and Rs 18 lakh, with a tax rate of 25%. This adjustment not only provides relief to existing taxpayers but also boosts disposable income, encourages consumption, and ultimately drives GDP growth.

“Looking at the biased attitude of the government towards the new tax regime, the increasing number of people opting for it, and the fact that the limits of various deductions available under the old regime have not been enhanced after the introduction of the new tax regime, do not get shocked if the finance minister altogether scraps the old tax regime,” tax and investment expert Balwant Jain said.