Income Tax Expectations: Higher tax exemption, new slabs likely for salaried class

The Institute of Chartered Accountants of India (ICAI) on Thursday said it hopes the Union Budget will have measures to rationalise taxation for startups as well as simplify compliance requirements for professionals.

The Budget for 2025-26 will be presented by Finance Minister Nirmala Sitharaman in the Parliament on February 1.

"We hope for measures that simplify compliance for professionals, rationalise taxation for startups, and incentivise ESG (Environmental, Social and Governance)-led initiatives through tax benefits.

Increasing capital expenditure and putting more disposable income in the hands of consumers, particularly urban consumers, will be pivotal to uplifting growth in domestic demand," EY India Chief Policy Advisor DK Srivastava said.

The EY Economy Watch January 2025 report anticipates that the government may continue on its fiscal deficit glide path, reducing the fiscal deficit for FY26 to 4.4 per cent of GDP. The government had budgeted a 4.9 per cent deficit for the current fiscal and EY expects this number to come in at 4.8 per cent in revised estimates in the 2025-26 Budget to be presented on February 1.

This can be enabled by accelerating domestic demand and private consumption, as well as by increasing the government’s capital spending by at least 20 per cent. This shall pave the way for sustained economic growth while ensuring fiscal discipline, EY said.

For the current fiscal, the government had budgeted a capex of Rs 11.11 lakh crore. However, Lok Sabha elections in 2024 had slowed capex momentum in April-July, leading to a shortfall in targeted capex spend.

The FY26 Budget may project a 20 per cent increase in capex spending to drive economic activity, leave more disposable income in the hands of people and target a fiscal deficit of 4.4 per cent of GDP for the fiscal ending March 2026, a EY report said on Thursday.

EY India Chief Policy Advisor DK Srivastava said amid continuing global uncertainties, India may have to rely largely on domestic demand drivers to support the growth momentum.

"The FY26 budget should therefore restore the momentum of growth in GoI's capital expenditure. This may be supplemented by some rate rationalisation and income tax deductions aimed at increasing personal disposable incomes, particularly in the hands of lower income and lower middle-income groups," he said.

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.