Budget 2025: Anticipated Tax Benefits for Salaried and Middle-Class Citizens

The Union Budget 2025 is set to be presented in the Lok Sabha on February 1, and taxpayers are eagerly awaiting announcements regarding income tax relaxations. Expectations include higher rebates and exemptions to increase savings and boost spending power.

In its pre-budget recommendations, the State Bank of India (SBI) has suggested that the government phase out the old tax regime and shift all 8.2 crore taxpayers to the new tax regime.

Income Tax Modernization in Focus

The government began reviewing the Income Tax Act of 1961 during the Budget 2024. Reports indicate that a new income tax bill may be introduced in the upcoming budget session, aimed at simplifying and modernizing the tax framework.

SBI’s Recommendations

SBI has put forward key suggestions to make the tax structure more efficient:

Increase NPS Deduction: Raise the National Pension System (NPS) deduction limit from ₹50,000 to ₹1 lakh.

Higher Medical Insurance Exemption: Double the medical insurance exemption under Section 80D from ₹25,000 to ₹50,000.

These changes are expected to benefit taxpayers while ensuring compliance and ease of filing.

Tax Scenarios Suggested by SBI

SBI has outlined three possible approaches to transition taxpayers to the new tax regime:

1. Reduce the Top Tax Rate to 25%

Lower the peak tax rate for incomes above ₹15 lakh to 25%.

Eliminate most exemptions, except healthcare (₹25,000) and NPS (₹50,000).

Introduce a flat 15% tax on bank deposits.

Revenue Loss: ₹74,000 crore to ₹1.08 lakh crore, depending on exemption adjustments.

2. Keep the 30% Peak Rate but Adjust Slabs

Retain the 30% rate for incomes above ₹15 lakh.

Lower the tax rate for ₹10–15 lakh earners to 15%.

Revenue Loss: ₹16,000 crore to ₹50,000 crore.

Benefits: Middle-class taxpayers could save ₹34,500 to ₹1.15 lakh annually.

3. Combine Reduced Rates and Adjustments

Mix a reduced top tax rate (25%) with a lower slab rate (15% for ₹10–15 lakh incomes).

Revenue Loss: ₹85,000 crore to ₹1.19 lakh crore.

SBI’s Preferred Option

SBI has highlighted the second option as the most balanced. This approach minimizes revenue loss (0.14% of GDP) while providing relief to the middle class. The report suggests that reduced tax rates for the ₹10–15 lakh bracket would directly increase disposable income, stimulating consumption.

Rising Costs and Taxpayer Expectations

Inflation, particularly high food prices, has affected disposable incomes in urban areas, slowing down private consumption. Middle-class taxpayers are hoping for measures that ease their financial burden, such as increased savings incentives and relief from high living costs.

The 2025 Budget presents a crucial opportunity for the government to balance taxpayer benefits with fiscal responsibility. SBI’s suggestions focus on creating a fairer and more efficient tax system while addressing the immediate concerns of taxpayers. How these recommendations shape the final budget remains to be seen.