Budget 2025: Annual income up to Rs 10 lakh to be tax-exempt? Higher deductions, new 25% slab on taxpayers’ wishlist

Budget 2025 Taxpayers’ Expectations: Finance Minister Nirmala Sitharaman will be presenting the Union Budget 2025-26 on February 1, 2025. Tax experts and taxpayers are hopeful that the government will be announcing some significant tax breaks for lower and middle-class taxpayers to give them some relief from inflation.

In the last Union Budget 2024-25, FM Sitharaman announced some more benefits for taxpayers under the new tax regime like an increase in standard deduction limit, revised tax slabs, and a rise in family pension deduction.

New Tax Regime: Key benefits

The New Tax Regime offers a higher tax-free income threshold, fewer deductions, and a simplified filing process. With minimal deductions and exemptions, taxpayers are no longer burdened with providing proof for claims. The tax-free income limit has been set at Rs 7.75 lakh.

For Assessment Year 2024-25, nearly 72% of the 9 crore income tax returns were filed under the New Tax Regime. Of these, over 70% reported taxable income of Rs 5 lakh or less, resulting in zero tax liability. Additionally, 88% of filers reported income below Rs 10 lakh, while 94% reported income under Rs 15 lakh. So, data shows that 9 in 10 taxpayers are either in a no-tax or a low-tax bracket.

With the government aiming to further increase the 72% of taxpayers currently under the New Tax Regime, tax experts recommend introducing more incentives and tax breaks to encourage more individuals to switch to it. One key suggestion is to raise the exemption limit to Rs 10 lakh, meaning individuals earning up to Rs 10 lakh annually would not have to pay any income tax.

As the government works to increase the percentage of taxpayers under the New Tax Regime, tax experts suggest introducing more incentives and relief measures to attract individuals. A key proposal is raising the basic tax exemption limit to Rs 10 lakh, which would mean individuals earning up to Rs 10 lakh annually wouldn’t have to pay any income tax.

Experts’ take on possible tax reliefs and rationalisation

Vimal Nadar, Senior Director, Research, Colliers India, highlights the need for rationalising tax slabs to make the New Tax Regime more appealing.

The proposal to introduce an additional tax slab of 25% for income levels between Rs 15 lakh and 20 lakh will surely provide significant tax relief and increase disposable income, Nadar noted. Increased liquidity in the hands of individuals will hold a higher potential to spur consumption, according to him. “The proposal to exempt income tax up to Rs 10 lakh will surely scale up liquidity in the hands of middle-class salaried individuals.”

Rony Antony, Partner & Leader, Corporate Tax (South), Tax & Regulatory Services, BDO India, points out the need for broader rationalisation within the tax framework. “The rationalisation of the income tax is long overdue. While some efforts were made in that direction with a proposed Direct Tax Code, not much has happened post-introduction of a draft.”

Priyank Shah, Co-Founder & CEO of The Financialist, believes that increasing the disposable income of taxpayers earning less than Rs 15 lakh is crucial to boosting private consumption.

“One of the key proposals can be to raise the basic exemption limit from Rs 3 lakh to Rs 5 lakh. This change would allow more individuals to keep a larger portion of their earnings tax-free. Additionally, there are discussions around revising tax rates for those earning up to Rs 15 lakh. Currently, the tax rates range from 5% to 20% (New Regime) for this income bracket, and a downward revision could significantly ease the tax burden on middle-income earners.”

Shah also highlights potential adjustments to the standard deduction, which could further reduce taxable income and provide financial relief. “These adjustments are anticipated to be part of a new tax regime which the government aims to make more attractive for taxpayers, encouraging them to move away from the old tax regime. By implementing these tweaks, the government could create a more favorable environment for individuals, encouraging spending and investment.”

Will Rs 10 lakh become the new tax-free threshold?

Ahead of the Union Budget 2025-26, the possibility of raising the exemption limit to Rs 10 lakh under the New Tax Regime is gaining traction. Experts agree that such measures could not only provide financial relief to middle-class taxpayers but also stimulate demand and consumption, aiding economic growth in the process. However, whether the government will take this step in Budget 2025 remains to be seen.

Will govt give major tax relief to taxpayers earning less than Rs 15 lakh annually?

Krishna Killa, Founder, Ironclad Asset Management, believes the government is likely to keep increasing the slabs in order to boost discretionary consumption. “Successive budgets have been progressively increasing the slabs to increase disposable income, and that trend is likely to continue in budget 2025. Also, the government could make efforts in order to boost consumption at the bottom of the pyramid, as rural demand has been lagging for a few years now.”

Budget 2024 had increased the slabs by Rs 1 lakh each in 5% and 10% tax rates, recalls Killa. “As has been the trend, tax rates are likely to remain the same as before with a Rs 50,000 to Rs 1,00,000 increase in thresholds for 5%/10%/15% slab rates,” he adds.

On whether the government will sweeten the new tax regime further to encourage more taxpayers to opt for it, he believes that soft nudges by increasing limits of standard deduction, pension deductions, leave encashment, etc, are likely to continue. “Due to these efforts, around 72% of tax filers have now shifted to a new tax regime since its introduction in 2020. Although the new regime has lower exemptions, it is structurally simpler and more straightforward for people to understand. Increases in deductions and slab-based tax savings are likely to further increase the adoption of a new regime.”

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