Budget 2025: Will There Be Income Tax Relief for Salaried Individuals?

The Union Budget 2025, scheduled to be presented on February 1, 2025, has sparked high expectations among salaried individuals and taxpayers across India. With rising inflation and the increasing cost of living, many are hoping for significant income tax relief to ease their financial burden. Economists and tax experts have also urged the government to implement reforms that could boost savings, increase disposable income, and stimulate economic growth.

In recent years, the government has introduced changes to the tax system, particularly through the new tax regime, but many taxpayers are still waiting for broader reforms that could provide meaningful relief. Let’s take a closer look at the current tax landscape, past reforms, and what taxpayers can expect from Budget 2025.

Why Is Income Tax Relief Expected in Budget 2025?

The demand for income tax relief stems from several economic and social factors:

1. Rising Inflation:
   The cost of living has increased significantly, putting pressure on household budgets. Tax relief could help individuals manage their expenses more effectively.
2. Boosting Disposable Income:
   Economists believe that reducing income tax rates or increasing exemptions could raise disposable income, encouraging savings and spending. This, in turn, could revive demand in sectors affected by sluggish consumption.
3. Stimulating Economic Growth:
   During a pre-budget meeting with Prime Minister Narendra Modi, experts suggested that tax reforms could play a key role in addressing economic challenges. Measures like reducing tax rates or expanding exemptions could stimulate spending on essentials and drive economic recovery.

Recent Changes in Income Tax

The last Union Budget (2024) did not make any changes to the old tax regime but introduced several modifications to the new tax regime to make it more attractive.

Key Changes in Budget 2024:

1. Widening of Income Tax Slabs:
   Two income tax slabs were expanded, providing relief to taxpayers in certain income brackets.
2. Increase in Standard Deduction:
   The standard deduction under the new tax regime was increased from ₹50,000 to ₹75,000, benefiting salaried individuals and pensioners.
3. Long-Term Capital Gains Tax:
   The long-term capital gains tax rate was reduced from 20% to 12.5%, but the removal of the indexation benefit offset some of the advantages for taxpayers.

These changes were aimed at simplifying the tax system and providing relief to middle-income earners, particularly those who do not claim deductions or exemptions.

A Look Back: Major Income Tax Relief in Recent Years

The last significant income tax relief for individual taxpayers was introduced in the Union Budget 2020-21, which unveiled the new and optional personal income tax regime.

Features of the New Tax Regime:

• Lower tax rates for individuals who opt out of claiming common exemptions and deductions (e.g., under Sections 80C and 80D).
• Simplified tax structure aimed at benefiting middle-income taxpayers.

According to Ajinkya Gunjan Mishra, Tax Partner at S&R Associates, the new tax regime has been particularly beneficial for taxpayers who do not claim deductions or exemptions. However, it remains optional, and many individuals continue to prefer the old regime due to its flexibility in claiming deductions.

How Does India’s Tax Structure Compare Globally?

India’s income tax structure is considered moderate compared to global standards.

• Basic Exemption Limit:
  India’s basic exemption limit of ₹3.5 lakh is lower than Singapore’s equivalent of ₹6-7 lakh but higher than many European nations.
• Top Marginal Tax Rate:
  Under the new tax regime, India’s top marginal tax rate is 39%, which is in line with global averages. For comparison:

• UK: 45%
• US: 37%
• Australia, Germany, Japan: Around 45%

Tax experts believe that rationalizing effective tax rates could further enhance purchasing power and boost economic activity.

Expectations from Budget 2025

As the government prepares to present the Union Budget 2025, taxpayers are hoping for measures that will provide meaningful relief.

Possible Announcements:

1. Increase in Basic Exemption Limit:
   Raising the basic exemption limit from ₹3.5 lakh to ₹5 lakh could provide significant relief to low- and middle-income taxpayers.
2. Further Reforms to the New Tax Regime:
   Expanding income tax slabs, reducing rates, or introducing additional deductions under the new regime could make it more appealing.
3. Standard Deduction Increase:
   Another hike in the standard deduction could help salaried individuals manage rising expenses.
4. Incentives for Savings:
   Introducing new tax-saving instruments or increasing limits under existing sections (e.g., Section 80C) could encourage savings and investment.

Conclusion

The Union Budget 2025 is expected to bring much-needed income tax relief for salaried individuals and taxpayers. With rising inflation and economic challenges, measures like reducing tax rates, increasing exemptions, or expanding the standard deduction could provide significant financial relief and boost consumer spending.

While the government has made efforts to simplify the tax system through the new tax regime, many taxpayers are still waiting for broader reforms that address their financial concerns. As February 1 approaches, all eyes will be on Finance Minister Nirmala Sitharaman to see if the government delivers on these expectations.

Whether it’s through rationalizing tax rates, increasing the basic exemption limit, or introducing new savings incentives, Budget 2025 has the potential to make a meaningful impact on the lives of millions of taxpayers. For now, the hope for income tax relief remains high, and the coming weeks will reveal whether these expectations are met.

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