SBI pushes tax overhaul: Mandatory shift to new regime could save taxpayers Rs 1.15 lakh

The State Bank of India (SBI) has proposed mandating the new tax regime for all taxpayers while sparing key social security exemptions, per its Prelude to Union Budget 2025-26 report. The plan seeks to simplify India’s labyrinthine tax code but risks Rs 50,000 crore in annual revenue losses.

Core recommendations:

Universal New Regime

Shift all 8.2 crore taxpayers to the simplified system, scrapping the old regime’s ₹4.5 lakh average exemptions per filer.

Exemption carveouts

Retain and enhance deductions for:

NPS contributions (raised to Rs 1 lakh/year from Rs 50,000).

Medical insurance (Rs 50,000 exemption, up from Rs 25,000).

Slab rationalisation:

Reduce the 20% rate to 15% for Rs 10-15 lakh incomes.

Retain 30% peak rate for earnings above Rs 15 lakh.

Revenue Impact Analysis:

Case 1: Slash peak rate to 25% → ₹74,000 Cr–₹1.08 Lakh Cr loss.

Case 2: Keep 30% peak, cut ₹10-15L rate to 15% → ₹16,000 Cr–₹50,000 Cr loss (SBI’s pick).

Case 3: Hybrid approach → ₹85,000 Cr–₹1.19 Lakh Cr loss.

The report argues Case 2 balances fiscal prudence and consumer gains.

Retaining the 30% top rate limits revenue bleed to 0.14% of GDP while offering middle-income earners ₹34,500–₹1.15 lakh annual savings.

Trade-offs

• 1.5 crore taxpayers impacted: Only those claiming NPS/medical breaks survive exemption purge.
• Pareto Principle: 92% of old-regime exemptions (HRA, LTA, education loans) would be eliminated.
• Fiscal math: Losses offset by projected Rs 2.21 lakh crore gain from eliminating other deductions.

“Rationalising rates with least revenue loss is critical to fund India’s $6.4 trillion infrastructure needs,” the report states, noting the new regime could boost compliance by reducing litigation-prone exemptions.

The proposals face headwinds. States like Karnataka (11% revenue spent on welfare schemes) and Maharashtra (9%) may resist central tax cuts amid their own fiscal strains. Direct taxes, now 58% of collections – their highest since 2010 – leave limited room for experimentation.

SBI acknowledges risks: “Transition shock for 1.5 crore taxpayers clinging to old exemptions.” But it frames the overhaul as inevitable: “A simplified tax architecture is non-negotiable for $7 trillion GDP ambitions.”