By Ravi Jain
Budget 2025 income tax expectations: The announcement of new income tax regime in India’s Union Budget 2020 was a progressive step by the Hon’ble Finance Minister Sitharaman towards simplification and moving away from administratively heavy tax exemption regime. This paved the way for taxpayers to pay income tax at a reduced slab rate in exchange for most of the exemptions and deductions otherwise available under the old income tax regime. This trade-off was intended to provide a transparent and straightforward tax calculation mechanism as an alternative to the traditional tax computation mechanism loaded with several internal tax exemptions calculations and therefore the complexities also leading to litigation.
For the initial few years there was not much uptake of the new income tax regime amongst the taxpayers. This resulted in another amendment of making the new income tax regime as the ‘default’ tax regime effective from the Financial Year (FY) 2023-24..
As per statistics released by PIB, approximately 72% of the taxpayers have opted for the new income tax regime i.e., 5.27 crore tax returns were filed for Assessment Year (AY) 2024-25 under the new income tax regime out of the total 7.28 crore. The enhancement of Standard Deduction against salary income from Rs 50,000 to Rs 75,000 from FY 2023-24, has further propelled this shift. In contrast, the old income tax regime remained popular with the remaining 28% who continued to benefit from various exemptions/ deductions towards rental payments, interest/ principal payment towards housing loan, Mediclaim, life insurance premium, retirement corpus etc.
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The threshold limits for claiming exemption/ deductions under the old income tax regime has remained largely unchanged over the last decade, indicating a natural sunset for the old regime. Taxpayers who continue to favor the traditional structure are still hopeful for adjustments which are at least reflective of the rising inflation and costs of living in India. Their expectations from the FM are the following:
- Increase in Basic Exemption Limit: from Rs 250,000 to at least Rs 300,000.
- Enhanced Standard Deduction: Increase in standard deduction against salary income to bring on par with the deduction under new income tax regime, Rs 75,000.
- Higher deduction for interest on housing loan: Allow deduction towards housing loan interest up to Rs 300,000 under Income from house property and remove the current capping of Rs 200,000 (for both self-occupied and let out properties).
- Increased Limits under Section 80C & 80D: Enhance the limit under section 80C to Rs 200,000 and under 80D from Rs 25,000 to Rs 40,000 (Rs 50,000 to Rs 75,000 for senior citizens)
While it is well known that new income tax regime is simplified tax regime without tax exemptions and deductions but still to make the rest of the 28% filing tax returns under old income tax regime adopt new income tax regime, the expectations are –
- Reduction in the tax rates: from 20% to 15% for income ranging between Rs 12,00,000 – Rs 15,00,000, from 30% to 20% for income range between Rs 15,00,000 to Rs 20,00,000 and levying 30% tax rate for income over Rs 20,00,000. This could provide substantial relief to middle-class and salaried income taxpayers, potentially boosting consumer spending—a critical driver for economic growth.
- Enhance standard deduction: from Rs 75,000 to Rs 100,000, to account for inevitable professional expenses, also there are hardly any tax breaks otherwise available.
- Deduction for employee’s contribution towards National Pension Scheme (NPS): To extend deduction of Rs 50,000 under section 80CCD(1B) to bring in parity between old income tax regime and new income tax regime (opted by 72% taxpayers). This would encourage investment to build retirement corpus, promoting financial security and well-being and helps promote NPS as against Provident Fund.
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Off late the Income tax department has actively scanned disproportionate refunds and fraudulent claims for exemptions, reflecting improved governance. The Government recognizes the potential for misuse under the old income tax regime and is likely to implement stricter regulations, possibly paving the way for a gradual phase-out of the old income tax regime. The rollout and intelligent usage of ITBA 2.0, an advanced AI enabled administrative platform by the Government could come handy.
The taxpayers expect a clearer timeline for the long-awaited New Income Tax Bill, with the new income tax regime as a precursor, providing a glimpse into the future of our tax landscape. A simplified and efficient tax regime is crucial for economic growth, streamlined compliance, and enhanced government revenue, ultimately fostering equitable resource distribution.
(The author, Ravi Jain, is Partner, Vialto Partners. Inputs from Vikas Narang, Director and Harini Vishwanath, Manager)
