Budget 2025: Expected Changes in Tax Rate and Exemption/Deduction to reduce Financial Burden on Individuals
The Budget 2025 is at the forefront in everyone’s mind now. As for the country, it expects it to be some measures that shall alter the monetary and taxation trends of the nation for the ensuing year. At the core of driving economic growth with higher disposable income to support sustainable expenses, many expected changes are predicted in individual taxations.
Under the current tax structure, the old tax regime provides a basic exemption limit of Rs.2,50,000 along with an income slab rate of 5% on incomes between Rs.2,50,001 and Rs.5,00,000. As a result, anybody who earns an annual income up to Rs.5,00,000 will be liable for a tax rebate under Section 87A, thereby nullifying the tax liability. This regime has also qualified for a standard deduction of Rs.50,000 and housing loan interest of up to Rs. 2,00,000, making the total tax-exempt income Rs.7,50,000 given the condition. Against this, the new tax regime gives a higher basic exemption limit at Rs.3,00,000, and a 5% tax rate is applicable between Rs.3,00,001 and Rs.7,00,000.
Individuals with a tax income up to Rs.7,00,000 will get an income tax rebate of Rs.25,000 under Section 87A. Also, this takes their effective tax rate to zero. The new scheme also provides for a standard deduction of Rs.75,000 and does not offer a separate deduction on the interest from the housing loan. So the total amount of tax-free income under the new scheme comes out to be Rs.7,75,000. These reflect an attempt on the part of the government to attract taxpayers toward the new regime by simplifying the provisions and by enhancing exemption limits. Yet, adjustments to tax rates and exemptions are likely in Budget 2025 to make it more attractive.
Measures Proposed for Taxation Simplification
In an attempt to ensure the new tax regime is the default choice, tweaks in the form of further modifications in the slabs might be announced going forward.
One such proposal is to extend the benefit of housing loan interest deductions to the new regime.
If implemented, this would ensure that individuals earning up to Rs.10,75,000 do not pay any tax under the new regime and make home ownership more accessible and affordable. It is also likely to give a much-needed boost to the real estate sector, thus stimulating economic growth and generating employment opportunities.
Simplification of Residence Status Determination for Income Tax Purposes
The second reform that is expected in simplifying the determination of residential status for income tax purposes shall benefit various people. Currently, each individual is categorized as Resident, Resident but Not Ordinarily Resident (RNOR), or Non-Resident, often resulting in ambiguity as to how to interpret taxable income. To get rid of the RNOR classification, there has been talk of a two-tier system whereby only Resident and Non-Resident categories have been proposed. Simplifying to just the days spent in India in a given financial year might result in greater clarity, easier compliance, and fewer disputes. It brings Indian tax closer to global standards and thus improves its efficiency for the taxpayer and also the authorities.
Capital Gains Tax Modification
Captured increasing investment flows in the market-based products, including equities and mutual funds. Capital gains tax will experience a major overhauling. The interest received by the individuals on bank deposits is considered an income that is taxed, which deters savings in banks for a longer period. Reclassification of bank deposits into capital assets could solve this problem.
The maturity amount of fixed deposits, under the new classification, will be considered a sale consideration and taxed only on that amount which represents the difference between the amount invested and the amount at maturity. It would, therefore, qualify as capital gains and would accordingly be treated as either short-term or long-term. This move would promote the saving culture by making the tax system even more benevolent, benefiting mainly senior citizens who take pride in relatively less risky savings instruments.
Conclusion
The Union Budget 2025 is expected to continue driving economic reforms while keeping the fiscal deficit within prescribed limits. By introducing changes in tax rates and refining exemptions and deductions, the government aims to reduce the financial burden on individuals, stimulate consumption, and encourage investments in key sectors such as real estate. These anticipated reforms promise a balanced approach to taxation, fostering economic growth and financial inclusion.
