As India gears up for the Union Budget 2025, set to be unveiled by Finance Minister Nirmala Sitharaman on February 1, taxpayers across the country are eagerly awaiting potential changes to the income tax structure. With inflation and cost-of-living pressures mounting, there is a growing demand for relief measures, particularly for middle-class earners.
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This budget presents an opportunity for the government to introduce significant reforms that could ease financial burdens while boosting economic activity.
Key Expectations for Income Tax Changes
Increased Basic Tax Exemption Limit
One of the most anticipated changes is an increase in the basic tax exemption limit under the new tax regime from ₹3 lakh to ₹5 lakh. This move aims to provide immediate relief to taxpayers, particularly those in the lower-income brackets, by allowing them to retain more of their earnings.
A higher exemption limit would enhance disposable income, potentially increasing consumer spending and savings. Financial experts argue that this step is essential to address inflationary pressures and maintain a balance between fiscal prudence and taxpayer relief.
Revisions in Income Tax Slabs
Currently, under the new tax regime, individuals earning between ₹6 lakh and ₹9 lakh pay 10% tax, while those earning between ₹9 lakh and ₹12 lakh pay 15%. Experts are advocating for a revision in these slabs to make them more favorable for individuals earning up to ₹15 lakh.
One of the proposed changes is reducing the tax rate to 10% for incomes up to ₹15 lakh and 20% for incomes up to ₹20 lakh. If implemented, this revision would significantly benefit middle-income earners by increasing their disposable income, helping them better manage expenses in an era of rising costs.
Elimination of Exemptions in Old Tax Regime
Another significant expectation revolves around the potential removal of exemptions under the old tax regime. The government has been promoting the new tax regime as a simpler alternative, and financial experts suggest that a complete transition to the new system could help streamline compliance.
However, removing exemptions might pose challenges for taxpayers who have structured their finances around traditional deductions such as Section 80C (investments in PPF, EPF, life insurance, and ELSS), 80D (health insurance premiums), and home loan interest benefits. The challenge lies in striking a balance between simplification and ensuring that taxpayers do not lose out on crucial tax benefits.
Enhanced Deductions for Health and Life Insurance
Given the rising healthcare costs in India, taxpayers are hoping for increased deductions on health and life insurance premiums. Currently, under Section 80D, individuals can claim deductions of up to ₹25,000 (₹50,000 for senior citizens) on health insurance premiums.
Financial experts suggest that increasing these limits could encourage more people to invest in health insurance, promoting financial security while reducing the burden on the public healthcare system. Additionally, increasing deductions for life insurance premiums under Section 80C could incentivize long-term financial planning and provide a safety net for families.
Introduction of Direct Tax Code (DTC)
There are also expectations regarding the introduction of a new Direct Tax Code (DTC), which aims to modernize and simplify the Income Tax Act. The proposed DTC could reduce litigation, improve compliance, and make tax filing more accessible for individuals and businesses.
Experts believe that a well-structured DTC would create a more transparent and predictable tax regime, benefiting both taxpayers and the government by improving revenue collection efficiency.
The Economic Rationale Behind These Changes
The proposed tax reforms are not just about providing relief to taxpayers—they are also intended to stimulate economic growth. Post-pandemic, India’s economy has been recovering steadily, but consumer spending remains a crucial factor in sustaining this momentum. By increasing exemption limits and revising tax slabs, the government can boost disposable income, encouraging higher spending in key sectors such as retail, healthcare, education, and housing.
Additionally, simplifying the tax structure by promoting the new tax regime and potentially introducing the Direct Tax Code could enhance compliance and reduce the complexities involved in tax filing. A streamlined system with lower litigation risks and clearer regulations would make tax compliance easier for individuals and businesses alike.
From a macroeconomic perspective, tax cuts and higher exemptions could lead to increased consumption, ultimately benefiting businesses and generating higher indirect tax revenues through GST collections. If these measures are coupled with investments in infrastructure and job creation, they could provide a significant boost to the overall economy.
Potential Challenges
While these proposed changes are expected to be beneficial, they may also present certain challenges. Transitioning all taxpayers to a new regime could create operational difficulties, particularly for individuals who have structured their finances around exemptions in the old system. Removing exemptions without providing alternative benefits might result in dissatisfaction among salaried professionals and retirees who rely on these deductions for tax savings.
Moreover, revising tax slabs and increasing exemptions will impact government revenues. The government must strike a balance between providing tax relief and ensuring that fiscal deficit targets are not compromised. If revenue shortfalls arise, alternative measures such as increased GST collections or higher corporate tax revenues may need to be considered to compensate for the loss.
Conclusion
As India approaches the Union Budget 2025, there is widespread anticipation regarding potential income tax reforms that could significantly impact millions of taxpayers. Key expectations include increasing the basic exemption limit, revising tax slabs, enhancing deductions for health and life insurance, and introducing a Direct Tax Code to simplify compliance. While these changes could provide much-needed relief to middle-class earners, they must be implemented carefully to avoid operational and fiscal challenges.
With the budget announcement scheduled for February 1, all eyes will be on Finance Minister Nirmala Sitharaman to see how the government balances taxpayer relief with economic growth. If the proposed reforms are effectively executed, they could reshape India’s tax landscape, making it more efficient, transparent, and taxpayer-friendly in the years to come.
BY – JYOTHI
