Key Expectations for Union Budget 2025: Tax reforms and relief

The Union Budget 2025 offers a unique opportunity to reshape India's tax system.

By Mayur Shah

With the fiscal year nearing its end, anticipation for the Union Budget 2025 is growing among Indian taxpayers, industry professionals, and economic analysts alike. As India emerges from recent global challenges, there is a strong desire for tax reforms that would reduce the tax burden on individual taxpayers, encourage savings, and drive sustained economic growth. This analysis speculates on the potential tax measures the 2025 Budget might introduce for individual taxpayers.

Increase in Basic Exemption Limit: One of the most pressing expectations for Budget 2025 is an upward revision of the basic exemption limit under the New Tax Regime (NTR). With the current threshold at Rs 3 lakhs, rising inflation has made it inadequate. Taxpayers are hoping for a revision to Rs 5 lakhs, which would provide relief to a broad segment of the population, easing the impact of limited deductions available under the NTR.

Housing-Related Tax Reliefs: Owned House: Eliminating the Rs 2 lakh cap on offsetting house property losses against other sources of income would provide significant tax relief while stimulating investment in India's real estate sector.

Rented House: Expanding the eligibility for the higher 50% HRA exemption to include Tier 2 cities such as Hyderabad, Pune, Bengaluru, Ahmedabad, Gurgaon, and others, alongside existing metro cities, would provide more equitable tax benefits for individuals residing in these rapidly growing urban areas.

Guidelines for Emerging Modern Assets: As cryptocurrencies and Non-Fungible Tokens (NFTs) gain traction, the release of clear taxation guidelines on the same is crucial to ensure compliance and eliminate legal ambiguities. The valuation of Electric Vehicle (EV) perquisites is currently a grey area, and establishing clear valuation guidelines for EVs would encourage their wider adoption and provide clarity on tax implications for both employers and employees.

Enhancement of Investment-Linked Deductions under Section 80C: The stagnant cap of Rs 1.5 lakh for several years has fueled widespread demands for an increase in the limit. This revision would not only promote investments but also encourage greater personal savings and provide individuals with additional avenues to reduce their tax burden.

Simplification of Retirement Benefits Taxation: It is crucial to simplify the taxation of perquisites on employer contributions to recognised provident funds, approved superannuation funds, and the National Pension Scheme exceeding Rs 7.5 lakhs, to mitigate the challenges faced by both employers and employees. Furthermore, to enhance employee benefits, it is also imperative to defer TDS on interest earned on an employee’s PF contribution exceeding Rs 2.5 lakhs per annum until withdrawal or cessation, aligning taxation with income realisation.

Increasing Gift Tax Exemption: The tax-free threshold for gifts should also be increased from Rs 50,000 to Rs 1,00,000, given the stagnant limit over the years and to account for the impact of inflation.

Double Tax Avoidance Agreement (DTAA) Relief at Withholding Stage: Currently, Indian employers withhold taxes on employee salaries based on domestic income-tax rates. However, employees may be eligible for exemption or lower tax rates under applicable Double Tax Avoidance Agreements (DTAA) with various countries. Introducing a provision in the income-tax laws to allow employers to consider such DTAA benefits at the time of withholding would significantly reduce the tax outflow for employees.

Extending Employee Stock Ownership Plan (ESOP) Benefits: Extending ESOP tax deferment at the stage of sale (as opposed to the exercise stage) for all employers and not just startups covered under Section 80-IAC of the income-tax laws could provide equal benefits for all employees while fostering stronger alignment with corporate growth.

Reduction in STCG Tax Rate: Given the volatility of the market and the high risk borne by individuals, lowering the 20% tax rate on Short-Term Capital Gains (STCG) could incentivise investments and provide much-needed relief to investors.

Enhancing Accountability in Taxpayer-CPC Interactions: As taxpayers diligently fulfil their obligations, it is equally important to establish a robust mechanism for addressing grievances. This not only fosters trust and transparency in the system but also lays the foundation for accelerated economic growth.

Thus, the Union Budget 2025 offers a unique opportunity to reshape India's tax system. By focusing on equity and growth, the government can introduce reforms that not only reduce the tax burden on individuals but also boost the economy towards a brighter future. The hope is that the budget will align with the aspirations of the nation and create a more prosperous and stable financial landscape for all.

--Alisha Chowhan, Senior Tax Professional also contributed to the article.

(Mayur Shah, Tax Partner, EY India.)

Views are personal and do not represent the stand of this publication.