Budget 2025: 25% Tax Rate for Middle Class, No Tax up to Rs 8 Lakh Annual Income, More Tax Reliefs Expected!

This weekend promises to be exciting as we eagerly await the Union Budget 2025, with key questions about its impact on all of us. Will there be tax savings? What steps will be taken to simplify the tax system? The answers will unfold this Saturday, February 1, 2025.

The New Personal Tax Regime

Introduced in 2020, the new tax regime aimed to simplify the tax system with reduced rates and the removal of certain deductions and exemptions. The Government has focused on promoting this regime, and in fact, almost 72% of taxpayers chose it when filing their returns for the fiscal year 2023-24. There are a few proposals under consideration for the new tax regime in the upcoming budget:

Income Tax Slab Revision: The basic exemption limit could be increased from Rs. 300,000 to Rs. 350,000, offering much-needed relief to individuals, especially with inflationary pressures. This would boost disposable income for taxpayers.

Introducing a New Slab: A new income tax slab could be introduced to benefit the middle-income group. It is expected that taxpayers with incomes up to Rs. 3,00,000 will continue to enjoy no tax. However, incremental tax rates could be introduced, making it progressively higher for those earning above Rs. 3,00,000.

Expected Deductions: Among the very few deductions allowed under the new tax regime, the Government could extend the benefit of individual contributions to the National Pension Scheme (NPS). Currently, only the employer's contribution is deductible, but a proposal may include individual contributions, especially benefiting non-salaried taxpayers.

Rebate Under Section 87A: Currently, residents with income up to Rs. 7 lakh are eligible for a full tax rebate under Section 87A. This limit may be raised to Rs. 8 lakh to further benefit the lower-income group.

For Taxpayers Opting for the Old Tax Regime

While the Government is likely to continue its push for the new tax regime, it may introduce some changes for the remaining 28% of taxpayers who still prefer the old system:

Income Tax Slab Increase: The basic exemption limit under the old tax regime may be increased by Rs. 50,000, from Rs. 250,000 to Rs. 300,000, offering some relief to taxpayers.

Deductions for Salaried Individuals: Several long-standing deductions, such as the children's education allowance and hostel allowance, may see an increase. The current deduction of Rs. 100 per month for children's education and Rs. 300 per month for hostel allowance could be revised to Rs. 2,500 and Rs. 5,000 respectively. This is in response to the rising cost of education. Additionally, the Government may extend the Leave Travel Concession to include international travel destinations, something that many taxpayers have been advocating for.

House Property Deduction: Taxpayers can currently claim up to Rs. 200,000 on housing loan interest if the property is acquired within 5 years from the end of the financial year in which the loan was taken. With delays in housing projects and rising property prices, the Government may extend the limit to 7 years and increase the deduction by Rs. 50,000. Another proposal could be to remove the cap on setting off losses from house property, allowing taxpayers to set off losses on an actual basis, as was the case before FY 2017-18.

Enhancing Deductions: There are expectations that the deduction limit under Section 80C could be increased from Rs. 1.5 lakh to Rs. 2 lakh, a step that could benefit many taxpayers who invest in various schemes like PPF, life insurance, and more. Also, the deduction under Section 80TTA, for interest earned on savings accounts, might be increased by Rs. 10,000. While senior citizens can currently claim up to Rs. 50,000 in interest on both savings accounts and fixed deposits, the proposal would include fixed deposits under this provision for all individuals.

The Road Ahead

As the countdown to the Union Budget 2025 continues, it will be interesting to see how the Government balances the goals of tax relief, financial discipline, and simplifying the tax system. The challenge will be to bring joy to taxpayers while maintaining a healthy economic trajectory that supports the broader ambition of achieving a USD 5 trillion economy. With all eyes on the announcements this weekend, the future of tax reforms looks promising, but we’ll have to wait and watch to see the actual changes.