Income Tax Budget 2025 LIVE: Shortly Finance Minister Nirmala Sitharaman will announce revisions to the tax system for the upcoming fiscal year. The middle-class population is eagerly anticipating possible decreases in tax rates and increases in exemption limits amid rising inflation and shifting consumption patterns.
During his pre-Budget 2025 address on Friday, Prime Minister Narendra Modi expressed his hope for the Goddess to continue blessing the underprivileged and middle-income groups. His speech indicated a budget focused on economic relief, tax adjustments, and enhanced welfare programs. Subsequently, President Droupadi Murmu reiterated the government’s dedication to realising the aspiration of the middle class to own their own homes in her address.
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In the last Budget, Finance Minister Sitharaman increased the standard deduction for salaried employees and pensioners who opted for the new tax regime to Rs 75,000 annually. Those under the old regime, on the other hand, still received a standard deduction of Rs 50,000.
Top Expectations for Budget 2025
1. UPS taxation
The Finance Ministry notified the Unified Pension Scheme (UPS) on 24 January as an option under the National Pension System (NPS) for central government employees who joined on or after January 1, 2004. Like the OPS, the UPS provides a guaranteed pension. It aims to give stability, dignity, and financial security to government employees after retirement, assuring their well-being and a secure future. More importantly, the UPS promises retirees a fixed pension, unlike the NPS. This was one of the major criticisms of the NPS. It is expected that the FM might elaborate on taxation of Unified Pension Scheme.
2. Direct Tax Code
The Direct Tax Code 2025 aims to update the existing framework by replacing the Income Tax Act of 1961 and the Wealth Tax Act of 1957. Some major proposals include expanding income tax brackets, minimizing exemptions, providing clearer tax regulations, and improving compliance with streamlined processes. In the latest budget, Sitharaman presented a plan for a six-month evaluation of the Income Tax Act, 1961, with intentions to introduce the Direct Tax Code 2025. One significant anticipated modification is the elimination of the financial year (FY) and accounting year (AY) concept, which has historically caused confusion. Additionally, there may be a new 5% tax rate imposed on income from LIC policies, a source of revenue that was previously untaxed under the 1961 legislation.
3. Hike in basic tax exemption limit
It is anticipated that the Finance Minister could announce a tax exemption on annual income up to Rs 5 lakh. Currently, individuals earning Rs 3 lakh or less are eligible for basic tax exemption in the new regime. This proposed change may specifically benefit taxpayers who choose the new tax regime, as the government aims to boost the disposable income of those in lower income brackets.
It should be noted that, under the new regime, individuals earning up to Rs 7.5 lakh annually are exempt from paying tax, thanks to the Rs 75,000 Standard Deduction and a tax rebate of up to Rs 25,000 under Section 87A.
If the basic tax exemption up to Rs 5 lakh is introduced, adjustments in other tax slabs are expected. This move is likely to decrease the tax burden for individuals in higher income brackets. It aligns with the government’s goal of simplifying the tax system and encouraging more taxpayers to transition to the new tax regime, which has already been adopted by over 72% of taxpayers.
4. New Tax slabs
The finance minister is anticipated to make adjustments to the tax slab and rates in the new regime, while keeping the old regime unchanged, similar to the previous budget. According to several reports, there is a possibility that the FM may consider offering some relief to salaried taxpayers in the ₹15-20 lakh bracket by potentially expanding the 20% tax slab in the new regime or introducing a new 25% tax slab.
Some proposed changes in tax slabs
Annual Income Tax Rate (%)
Rs 0 to Rs 5 lakh NIL
Rs 5 lakh to Rs 10 lakh 5%
Rs 10 lakh to Rs 12 lakh 10%
Rs 12 lakh to Rs 15 lakh 20%
Rs 15 lakh to Rs 20 lakh 25%
Above Rs 20 lakh 30%
5. Home loan
In Modi 1.0, a significant initiative launched was the PMAY subsidy scheme. This scheme aimed to provide subsidies to the Economically Weaker Section (EWS), Lower Income Group (LIG), and Middle-Income Group (MIG) of up to Rs 2.67 lakh, based on the loan amount and tenure. The scheme was originally discontinued for MIG applicants on March 31, 2021, and later for EWS and LIG applicants in March 2022. However, it was subsequently reinstated for EWS and LIG applicants due to their lower loan amounts.
The eligibility for MIG under the scheme was linked to home prices up to Rs 45 lakh, which were considered affordable housing during that period.
> MIG-I: Annual household income of Rs 6,00,001–12,00,000.
> MIG-II: Annual household income of Rs 12,00,001–18,00,000.
Considering the significant rise in housing costs, the government may contemplate reinstating the PMAY subsidy program for the MIG demographic. This initiative would not only offer financial assistance to buyers but also boost the disposable income of salaried individuals and the middle class.
Furthermore, there is a likelihood that the government will introduce tax benefits for home loan deductions in the upcoming tax system, akin to those existing in the previous tax structure.
6. NPS benefits
In Budget 2024, FM Sitharaman extended additional benefits to National Pension System (NPS) subscribers under the New Tax Regime, but the impact was minimal. The limit for tax-free employer contributions to NPS under Section 80CCD(2) was raised to 14% from 10% of an employee’s basic salary in the new regime. However, the issue persists that many private-sector employers do not contribute to NPS for their employees, resulting in limited reach of the benefit among salaried taxpayers.
It is evident that the government aims to promote NPS as a retirement savings tool and encourage a transition to the New Tax Regime. There is a strong likelihood that the NPS deduction benefit of up to Rs 2 lakh on an employee’s contribution under the Old Tax Regime may be extended to the new regime. This move would enhance the attractiveness of NPS and encourage more taxpayers to move away from the old regime.
7. Standard Deduction
The New Tax Regime offers a significant benefit to taxpayers through an increase in the Standard Deduction to Rs 1 lakh, compared to the Old Tax Regime. In the previous budget, Finance Minister Sitharaman raised the Standard Deduction limit under the New Tax Regime from Rs 50,000 to Rs 75,000. However, the Standard Deduction remained unchanged under the Old Tax Regime.
The government is expected to exempt basic annual income up to Rs 5 lakh from tax and ensure individuals earning up to Rs 10 lakh annually do not pay any tax. Therefore, it is crucial to raise the Standard Deduction to Rs 1 lakh and retain the 87A rebate.
For instance, if an individual’s income of Rs 5 lakh is tax-exempt and income between Rs 5 lakh and Rs 10 lakh is taxed at 5%, the total tax liability would be Rs 20,000 after applying the Standard Deduction (expected at Rs 1 lakh).
If that were to happen, the ultimate tax responsibility would decrease to Rs 0 since the tax rebate of Rs 25,000 would fully offset it.
8. EPFO 3.0 benefits
The upcoming EPFO 3.0 initiative aims to revamp Employees’ Provident Fund (EPF) services by implementing key changes, such as removing the 12% cap on employee contributions. This enables employees to contribute more than the current limit, resulting in a larger retirement fund over time. With the government’s emphasis on the New Tax Regime, it is anticipated that deduction benefits on employee contributions may be introduced under this regime. This potential incentive could prompt more employees to boost their EPF contributions, ensuring not only a secure retirement but also tax savings. Currently, under the Old Tax Regime, employees can claim a deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961. Employer contributions up to 12% of the employee’s salary remain tax-exempt.
9. Abolition of Old Tax Regime
The old tax system, which has been in place for many years, allows taxpayers to utilise deductions and exemptions under various sections such as 80C, 80D, and HRA. These benefits have made it a popular choice for individuals, particularly those with substantial investments in tax-saving tools or those utilizing home loan advantages. Nonetheless, the system is known for its complexity.
Conversely, the new tax system, implemented in Budget 2020, offers reduced tax rates but requires taxpayers to forgo most deductions and exemptions. Initially, the new system faced challenges in gaining widespread approval, as taxpayers generally found the traditional system more advantageous due to the savings from deductions. Nevertheless, the government has been actively working on enhancing the appeal of the new system.
10. New tax slab of 25%
The Finance Minister is considering implementing a new tax slab of 25% for individuals earning between Rs 15 lakh and Rs 20 lakh. This measure is aimed at providing substantial tax relief and boosting disposable income. The increased liquidity in the hands of taxpayers has the potential to drive up consumption levels. Consequently, there is a possibility that the current threshold of Rs 15 lakh for the 30% tax slab may be raised to more than Rs 20 lakh in such a scenario.
Ajay Lakhotia, Founder & CEO, StockGro, said: “One of the key expectations is the introduction of a new 25% tax slab for incomes between Rs 15 lakh and Rs 20 lakh under the old regime. This move would ease the jump from 20% to 30%, encouraging higher compliance and providing relief to India’s growing middle class. Additionally, revisiting the surcharge structure for incomes above Rs 5 crore can ensure equitable contributions without discouraging wealth creation.”
