As Union Budget 2025 approaches, anticipation is building across India. Finance Minister Nirmala Sitharaman is expected to address growing demands for tax relief, particularly for the middle class. Proposed changes to income tax slabs and exemptions aim to boost disposable income amidst economic challenges, sparking optimism among taxpayers.
A Push to Revise the New Tax Regime
The new tax regime, introduced to simplify the taxation process, has struggled to gain widespread acceptance. To make it more attractive, the government is reportedly considering several revisions. These include increasing income thresholds, reducing tax rates, and offering targeted exemptions for essential expenses.
Proposed Changes Under Discussion
- Lower Tax Rates:
- Top tax rate for incomes above ₹15 lakh may drop from 30% to 25%.
- A 15% tax levy for those earning ₹10–15 lakh (currently taxed at 20%).
- Higher Exemptions:
- Health insurance premium deductions could rise to ₹50,000.
- Contributions to the National Pension System (NPS) may see deductions increased to ₹75,000–₹1 lakh.
- Reintroduction of Home Loan Benefits:
- Suggestions include reviving deductions for home loan interest payments under the new tax regime.
These steps aim to balance simplicity and savings, a move welcomed by many middle-class taxpayers.
Balancing Revenue and Relief
While tax reforms may relieve financial burdens, they come with a significant cost to government revenue. The potential revenue loss from reduced tax rates and increased exemptions is staggering.
Estimated Revenue Losses:
| Proposal | Revenue Impact (₹ crore annually) |
|---|---|
| Lowering top tax rate to 25% | ₹74,000 crore to ₹1.1 lakh crore |
| Introducing 15% levy for ₹10–15 lakh | ₹85,000 crore to ₹1.2 lakh crore |
| Enhancing exemptions (health, pensions) | Additional losses yet to be quantified |
Such fiscal trade-offs raise questions about how the government will sustain spending on infrastructure and welfare programs.
Old vs. New Tax Regime: The Debate Continues
The introduction of the new tax regime in 2020 aimed to simplify taxation by eliminating most exemptions. However, many taxpayers have stuck with the old regime, leveraging deductions for home loans, rental allowances, and other expenses.
- For the New Regime:
Advocates highlight simplicity and lower tax rates, which may boost compliance and reduce administrative costs. - For the Old Regime:
Those favoring the old system argue that deductions and exemptions often lead to significant tax savings for families, especially those with home loans.
The government is unlikely to abolish the old regime entirely, recognizing that taxpayers value choice.
Benefits for the Middle Class: A Closer Look
Middle-class families stand to gain the most if these proposals are implemented. The changes could have far-reaching implications for their financial planning and disposable income.
How Taxpayers Could Benefit:
- Reduced Tax Burdens:
Lower rates and new exemptions mean direct savings for families, particularly in the ₹10–15 lakh income group. - Enhanced Disposable Income:
Increased deductions for health insurance and pension contributions allow households to retain more earnings. - Boosting Investments:
Home loan incentives and NPS tax breaks encourage long-term financial planning and asset creation.
These changes align with the government’s broader goal of stimulating economic activity by increasing household spending power.
Fiscal Challenges Loom
Despite the potential benefits, the government faces tough choices. Striking a balance between easing tax burdens and ensuring sufficient revenue for public expenditure is no small feat. Officials have expressed concern about introducing too many exemptions, which could complicate the system and reduce fiscal flexibility.
The debate around fiscal responsibility versus taxpayer relief is likely to dominate discussions leading up to the budget announcement. However, the growing demand for middle-class support may compel the government to adopt at least some of these proposed measures.
