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The upcoming Union Budget 2025 is generating significant anticipation, particularly regarding personal taxation. Taxpayers harbor high expectations fueled by factors such as declining returns on small savings, persistent inflation eroding disposable income, complexities inherent in the dual tax regime, and the lack of substantial post-pandemic tax relief for the middle class. While various reports present wishlists, the predictions below are grounded in realistic challenges and the current economic context. A key focus will be the government's ongoing effort to transition taxpayers to the New Tax Regime, currently adopted by over 72% of taxpayers. This transition is crucial given that a significant portion of tax revenue comes from a relatively small number of high-income earners. The data reveals a disparity between the total number of income tax return filers and actual taxpayers, highlighting the need for effective tax policies to broaden the tax base and ensure equitable contribution. The article analyzes several key predictions for personal taxation changes in Budget 2025.
One of the most significant predictions is the lack of substantial changes to the Old Tax Regime. The government's strategy prioritizes refining and incentivizing the New Tax Regime, aiming for a complete phase-out of the Old Tax Regime once a higher percentage of taxpayers transition. This approach reflects a calculated strategy to simplify the tax system and boost revenue through a more streamlined and potentially more efficient system. This decision is likely influenced by the substantial revenue generated by individuals earning between Rs 15 lakh and Rs 50 lakh, a demographic that predominantly uses the New Tax Regime. The persistence of the Old Tax Regime, however, acknowledges that a complete and immediate shift is not feasible or desirable for all taxpayers. The gradual phase-out demonstrates a pragmatic approach, acknowledging the complexities and sensitivities involved in comprehensive tax reform.
Significant changes are anticipated within the New Tax Regime itself. A key prediction involves raising the basic tax exemption limit to Rs 5 lakh. This would mark a substantial increase from the current Rs 3 lakh limit under the New Tax Regime, potentially leading to a cascading effect on other tax slabs. The rationale behind this prediction is the government’s aim to boost disposable income, particularly for low-income individuals and families. The current tax rebate under Section 87A of the Income Tax Act already provides a substantial benefit. Coupled with a potential increase to the basic tax exemption limit, this may result in no tax liability for those with an annual income up to Rs 10 lakh. This would involve introducing a new tax slab of 5% for incomes between Rs 5 lakh and Rs 10 lakh, creating a more progressive and potentially stimulative tax structure. This approach aligns with the government's broader economic objectives of stimulating consumption and investment by increasing disposable income for a substantial portion of the population. The existing tax structure disproportionately burdens salaried individuals, so reducing this burden could lead to broader economic benefits.
Further key predictions for Budget 2025 center around enhancing benefits within the New Tax Regime to encourage further adoption. One major prediction involves the integration of existing home loan deductions, currently available only under the Old Tax Regime, into the New Tax Regime. This is a crucial step considering that the home loan interest deduction is a primary reason many middle-class taxpayers remain under the Old Tax Regime. Offering these deductions under the New Tax Regime would greatly incentivize a shift. Similarly, enhancing NPS benefits under the New Tax Regime is also predicted. Currently, the increased tax-free contribution limit under Section 80CCD(2) hasn't produced the desired effect due to low private-sector employer participation in NPS. Extending the deduction benefit of up to Rs 2 lakh, currently available under the Old Tax Regime, to the New Tax Regime would potentially increase NPS participation rates among salaried individuals. Finally, the impending EPFO 3.0 reforms, which include removing the 12% cap on employee contributions, are expected to be accompanied by tax deduction benefits under the New Tax Regime, incentivizing higher employee contributions for retirement security and tax savings.
The government's apparent intention to encourage savings and increase consumption through its tax policies is evidenced by further predictions. Raising the standard deduction to Rs 1 lakh under the New Tax Regime, combined with maintaining the Section 87A rebate, would effectively eliminate tax liability for those earning up to Rs 10 lakh annually. This would be a considerable boon for taxpayers, creating significant additional disposable income. The introduction of a new 25% tax slab for annual incomes between Rs 15 lakh and Rs 20 lakh is another key prediction. This aims to provide tax relief to a higher-income bracket, further boosting consumption. This could also signal a potential increase in the threshold for the 30% tax bracket, demonstrating a wider approach to fiscal policy. The introduction of these proposed changes would significantly simplify the tax structure, and thereby significantly benefit the economy.
In conclusion, Budget 2025's proposed personal taxation changes are expected to be a delicate balance between encouraging the transition to the New Tax Regime, ensuring a fair and progressive tax structure, and incentivizing savings and consumption. The focus on enhancing the benefits within the New Tax Regime and offering greater tax relief is clear evidence of this policy intention. The predictions outline a path towards a more simplified, efficient, and ultimately beneficial tax system for both individuals and the Indian economy. While significant changes to capital gains tax are unlikely in the near future, the overall direction points toward a more robust and equitable tax landscape, providing greater support to taxpayers and contributing to the overall strength of the economy. Further clarity will only be available upon the announcement of the Budget 2025.
Source: Personal Taxation in Budget 2025: Our top 10 predictions