Tax Slab Expectations: Meaningful tax relief, basic exemption limit to Rs 5 lakh, slash number of TDS rates in Budget 2025

Budget expectations: With only one day remaining until the unveiling of the Union Budget 2025, the focus is squarely on the leadership of Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman. The measures they propose will play a pivotal role in shaping India's financial and tax landscape for the upcoming year.

Of particular importance is the call for tax relief for the middle class. This is not just a mere desire, but rather an essential requirement. In light of a sluggish economy, increasing inflation rates, and global instabilities, tax cuts could serve as a crucial stimulus for both individual taxpayers and businesses.

Simplified tax slabs

After the new income tax regime became the default tax regime, the government has made many changes in terms of tax slabs and introduced deductions. Tax experts believe that no major changes in the old tax regime are expected.  Any rationalisation in income tax slabs, rates and changes in basic exemption limit, rebates etc. can only be expected under the new income tax regime. 

The current income tax slabs introduced for FY 2024-25 were designed to alleviate the tax burden on average taxpayers. Industry experts anticipate a continued streamlining of income tax slabs and rates, specifically directing attention towards raising the threshold for the 30% tax slab to income levels exceeding Rs 20 lakh, instead of the current Rs 15 lakh.

Besides, the latest tax system provides a basic exemption limit of Rs 3 lakh. It is anticipated that this limit may be increased to Rs 5 lakh, leading to increased disposable income for individuals to either spend or save. This could potentially drive economic growth.

Sandeep Bhalla, Partner, Dhruva Advisors, said: 

> Revision of Tax Slabs: Increasing the basic exemption limit from Rs 2.5 lakh to Rs 5 lakh and raising the threshold for the 30% tax rate from Rs 10 lakh to Rs 20 lakh would provide substantial relief.
> Enhanced Section 80C Benefits: The deduction limit under Section 80C of the Income Tax Act, currently capped at Rs 1.5 lakh, should be doubled to Rs 3 lakh, encouraging greater savings and investments.
> Standard Deduction: Raising the standard deduction for salaried individuals from ₹50,000 to ₹1 lakh would put more disposable income in the hands of taxpayers.
> Child Education and Healthcare Benefits: Providing additional deductions for child education and healthcare expenses would directly address the financial challenges faced by the middle class.

"The government should rather focus on increasing disposable income in Union Budget 2025 to promote industry-wide consumption. The long-awaited rate cut should be a priority item at this hour as the RBI has maintained the rates for 11 consecutive meetings. A meaningful reduction of 25 to 40 basis points in the repo rates can help in alleviating the interest burden of borrowers, while reducing the overall cost of capital," said Raj Khosla, Founder & MD, MyMoneyMantra.

Standard deduction

According to experts, if major tax exemptions and deductions are not present in the new tax regime, Finance Minister Sitharaman should consider increasing the standard deduction to a minimum of Rs 1 lakh to promote a transition to the new regime. In Budget 2024, Finance Minister Nirmala Sitharaman raised the standard deduction for salaried employees and pensioners who choose the new tax regime to Rs 75,000 per year. Those who remain under the old tax regime will continue to receive a standard deduction of Rs 50,000.

“In the present-day inflationary conditions, the current Rs 75,000 standard deduction is too low. Salaried taxpayers are hoping the government will increase it to Rs 1 lakh in the new tax regime,” said Vivek Jalan, Partner at Tax Connect Advisory Services LLP.

TDS simplification

The current TDS process for property transactions involving non-resident individuals can be made more efficient. Currently, homebuyers are required to withhold 1% TDS on property transactions exceeding Rs 50 lakhs. When the seller is a resident, the process is simple. However, if the seller is a Non-Resident Indian (NRI), the buyer must obtain a Tax Deduction Account Number (TAN), deposit the withheld tax, and file e-TDS returns. To simplify this, the government could consider allowing buyers to utilize the same PAN-based system for NRI sellers as is used for resident sellers. This would eliminate the need for TAN and additional filings, thereby making the process more straightforward.

“Budget 2025 is expected to bring some major changes to pave the way for the New Income Tax. Some of the revolutionary expectations are rationalising TDS provisions by reducing the number of TDS rates, making the New Tax Regime more lucrative by increasing the basic exempting limit to Rs 5 lakh and increasing rebate on income of up to Rs 10 lakh and simplification in income tax return filing rules,” said CA Pratibha Goyal, Partner, PD Gupta & Company.