Budget 2025 might bring relief for taxpayers: Check expected reforms
What's the story
As India approaches the Union Budget 2025, expectations are high for significant changes in tax rates and exemptions that could ease the financial burden on individuals, particularly middle-class taxpayers.
Finance Minister Nirmala Sitharaman is set to present the budget on February 1, and discussions surrounding potential reforms have intensified in recent days.
Analysts and experts are advocating for adjustments to income tax slabs and an increase in the basic exemption limit to enhance disposable income for taxpayers.
Understanding basic
First, let's understand India's new and old income tax regimes
India currently followst two tax regimes: Old Tax Regime (OTR) and New Tax Regime (NTR).
The OTR provides deductions and exemptions on investments in insurance, PFs, and housing loans. Under this regime, income above ₹10 lakh is taxed at 30%.
NTR, launched in 2020, offers lower tax rates but doesn't provide major exemptions or deductions. In this regime, income between ₹10-12 lakh is taxed at 15%, income between ₹12-15 lakh at 20%, and income above ₹15 lakh at 30%.
Big change
Annual income up to ₹10L may become tax-free
Indian government earns most of its income tax from those earning ₹10 lakh or more, taxed at 30% under OTR.
The reforms in Budget 2025 could make an annual income of up to ₹10 lakh tax-free, up from ₹7.75 lakh in NTR.
This could be done by extending the benefit of exemption of interest (up to ₹2 lakh) on housing loans to the new regime.
The move will bring much-needed relief to homebuyers, making property ownership more affordable and accessible.
Tax modifications
Anticipated modifications to capital gains tax
As interest in stock market and mutual funds increases, many investors are moving away from traditional bank deposits.
This has made it difficult for the banking sector to raise low-cost CASA deposits. To counter this, the government is likely to reclassify bank deposits as capital assets.
The redemption amount paid on maturity would be treated as sale consideration and any excess amount taxed as capital gains.
This would encourage more people toward fixed deposits while providing a favorable tax environment.
Tax simplification
Simplification of residential status determination
The government is also looking to simplify the determination of an individual's residential status for income tax purposes.
Currently, India's income tax system classifies individuals into three categories: Resident, Resident but Not Ordinarily Resident (RNOR), and Non-Resident.
The proposed change would introduce a two-tier system: Resident and Non-Resident, based primarily on the number of days spent in India during a financial year.
This would eliminate ambiguity in residency determination and align with global standards.
Joint taxation
Joint taxation for married couples could be introduced
The Union Budget 2025 could also introduce joint taxation for married couples.
The proposal has been suggested by the Institute of Chartered Accountants of India (ICAI).
Under the new system, couples would be able to file their income tax returns (ITRs) jointly under the New Tax Regime.
The move would provide relief to families with a single source of income and promote better tax compliance.