Income Tax Expectations: Relief for taxpayers with higher exemption limits and revised slabs?

In India, 6 percent of the population files income tax returns, and less than 3 percent pays income tax. Among those who do, the salaried class disproportionately shoulders the tax burden. Our estimates suggest that salaried employees contribute approximately 50 percent of total personal income tax collections. This imbalance highlights the pressing need for reforms to create a fairer system for the salaried class while fostering economic growth. Read more

The new tax regime has indeed become more appealing over the years, but many taxpayers still find that their tax outgo is lower under the old tax regime for the financial year 2024-25.

Click here to check how the two tax structures stack up at present.

The treatment of buybacks under the new tax regime requires refinement to prevent the artificial taxation of capital receipts as dividend income. This includes buybacks funded by share premium or new securities, which do not represent distributed earnings. Additionally, alignment is necessary in the holding period for capital assets, such as reducing the slump sale period from 36 to 24 months, and adjusting the holding period for unlisted shares in IPO Offer for Sale from two years to one, in line with listed securities.

To encourage taxpayers to file returns on time, the government could introduce **benefits for compliant taxpayers, such as:

Reduced health insurance premiums

Lower interest rates for loans

Faster loan approvals

Priority access to government healthcare

Discounts on utility bills

Several key proposals aim to increase incentives for savings and investments, promoting long-term financial growth:

Increase the Section 80C limit to Rs 2.5 lakh, encouraging higher investments in ELSS, PPF, and NPS.

Reduction in LTCG (Long-Term Capital Gains) and STCG (Short-Term Capital Gains) rates to make investing more attractive and incentivize long-term equity investments.

Increase in Section 80TTA (for bank fixed deposits) and Section 80TTB (for senior citizens), boosting savings in bank deposits.

Home Loan Interest Deduction under Section 24B could be raised from Rs 2 lakh to Rs 3 lakh, making homeownership more affordable and stimulating the housing market.

The proposed reforms include:

Raising the basic exemption limit to Rs 5 lakh, which would provide immediate relief to middle-class taxpayers.

Higher tax slabs and an increase in the standard deduction will allow more money to stay in the hands of taxpayers, fostering greater savings and disposable income.

Equity Mutual Fund Inflows: In FY 2024, Rs 1.84 lakh crore flowed into equity mutual funds, reflecting growing interest in long-term investment.

Healthcare Gaps: Despite this, 60% of doctors are concentrated in metro cities, leaving rural areas under-served, and only 30% of India's population has health insurance, underlining the need for more accessible healthcare solutions.

These figures highlight the urgency of revising tax policies and personal finance strategies to ensure a better, more equitable financial future for all.

While the government has been pushing for wider adoption of the new tax regime, taxpayers with multiple deductions still find value in the old system. If Budget 2025 introduces further incentives or simplifies deductions, the decision-making process could become even more nuanced.

HRA often plays a crucial role in determining which tax regime is more beneficial, especially for high-income earners. Unlike other deductions, HRA does not have a fixed cap. Instead, the exemption allowed is the lowest of:

Actual HRA received

50% of basic salary (40% for non-metro cities)

Actual rent paid minus 10% of basic salary

If your annual income exceeds Rs 15 lakh and you claim deductions of at least Rs 4.33 lakh (plus Rs 50,000 standard deduction), the  old tax regime is more beneficial.

If you  do not claim deductions on  home loan interest (Section 24B) or House Rent Allowance (HRA), the  new tax regime might be the better choice.

On July 23, 2024, Finance Minister Nirmala Sitharaman introduced further incentives to encourage taxpayers to switch to the new regime. Budget 2024 liberalised income tax slabs under the simplified structure, making it more attractive.

However, the old tax regime remained unchanged, continuing to offer multiple deductions that can significantly lower tax liability.

While the new tax regime has been made more appealing over the years, many taxpayers still find that the old tax regime provides greater savings. This is particularly true for individuals who claim multiple deductions under Sections 80C, 80D, 24B, and 10(13A).

A hike in the basic exemption limit to Rs 10 lakh

A new 25% tax slab under the new, minimal-exemptions regime

An increase in the standard deduction to Rs 1 lakh

Since its introduction in 2020, the government has actively promoted the new tax regime by offering incentives and reducing compliance burdens. However, taxpayers continue to demand further concessions to make it more attractive. Whether the finance minister will accommodate these demands remains to be seen.

If additional tax benefits are introduced under the new regime, taxpayers will once again face the dilemma of choosing between the old and new structures.

Unlike last year, market experts believe the Finance Minister is unlikely to introduce a surprise hike in capital gains tax. However, some tax measures may be introduced to boost consumption at a time when economic growth has slowed. Still, analysts caution that the budget’s overall impact on reviving earnings and growth may be limited.

The Global Trade Research Initiative (GTRI) has put forth key tax reform recommendations, including:

Raising the income tax exemption limit to Rs 5.7 lakh, adjusted for inflation.

Increasing fixed deductions and exemptions, such as:

Raising the Rs 10,000 savings interest deduction to Rs 19,450 by 2025.

Adjusting the Rs 1.5 lakh deduction for insurance premiums and PF contributions to Rs 2.6 lakh.

Indexing tax slabs and exemptions to inflation to maintain the real value of tax benefits over time.

While the government may widen the tax base to lower rates for existing taxpayers, it could also restrict certain exemptions and deductions for high-net-worth individuals (HNIs).

The Budget may introduce an additional standard deduction for salaried individuals repaying home loans, with the deduction amount potentially varying based on location.

Proposals include a lower tax rate or the removal of the MAT/AMT provisions to encourage investments in International Financial Services Centres (IFSCs).

To streamline tax regulations, the government may introduce a simplified two-tier classification—Resident and Non-Resident—eliminating the current three-tier system.

Salaried individuals may see a rise in the standard deduction from Rs 75,000 to Rs 1,00,000, offering additional relief.

With a growing focus on boosting consumption, the Budget may raise the basic exemption limit or revise slab rates to reduce the overall tax burden on middle-class taxpayers.

Union Finance Minister Nirmala Sitharaman is set to present the Budget 2025-2026 on February 1. As always, salaried taxpayers eagerly anticipate potential rebates and tax reliefs under both tax regimes.

Reports suggest that significant changes to the new tax regime may be on the horizon. Among the key proposals are making annual income of up to Rs 10 lakh tax-free and introducing a new 25% tax slab for those earning between Rs 15 lakh and Rs 20 lakh.