As the Union Budget 2025 approaches, taxpayers and financial experts are keenly anticipating potential changes in income tax regulations. A significant focus is on the possibility of income tax relief, which can directly impact disposable incomes and overall economic sentiment. To understand the context and significance of any forthcoming tax relief, it’s essential to revisit the most recent substantial changes in India’s income tax landscape.
Understanding Income Tax Relief
Income tax relief refers to reductions in tax rates, increases in exemption limits, or the introduction of deductions that decrease the tax liability of individuals or businesses. Such measures are often implemented to stimulate economic growth, increase consumer spending, or provide relief during economic downturns.
The New Tax Regime: A Paradigm Shift
In the Union Budget 2020–21, the Indian government introduced the New Tax Regime, offering taxpayers an alternative to the existing tax structure. This regime featured reduced tax rates across various income slabs but required taxpayers to forgo numerous exemptions and deductions available under the old system. The objective was to simplify the tax process and increase compliance.
Key Features of the New Tax Regime:
- Lower Tax Rates: The regime introduced reduced tax rates for income slabs up to ₹15 lakh.
- No Exemptions/Deductions: Taxpayers opting for this regime had to forgo exemptions like House Rent Allowance (HRA), Leave Travel Allowance (LTA), and deductions under Section 80C, among others.
- Optional Adoption: Taxpayers could choose annually between the old and new regimes, based on which was more beneficial.
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Reception and Impact
Despite the intent to simplify taxation, the New Tax Regime witnessed limited adoption. Many taxpayers found the old regime more advantageous due to the benefits of exemptions and deductions, especially those related to savings and investments. Reports indicated that a significant majority continued with the old regime, leading the government to consider making the new system more attractive in subsequent budgets.
Budget 2023–24: Enhancing the New Tax Regime
Recognizing the lukewarm response, the government, in the Union Budget 2023–24, introduced several enhancements to the New Tax Regime:
- Improved Rebate: The rebate under Section 87A was increased, effectively making income up to ₹7 lakh tax-free for those opting for the new regime.
- Modified Tax Structure: The number of tax slabs was reduced, and income limits were adjusted to make the regime more taxpayer-friendly.
- Standard Deduction: A standard deduction of ₹50,000 was introduced for salaried individuals under the new regime.
- Reduced Surcharge: The highest surcharge rate was reduced from 37% to 25% for incomes above ₹5 crore, lowering the maximum effective tax rate.
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Expert Opinions
Economists and tax experts have had mixed reactions to these changes:
- Positive Outlook: Some believe that the reduced tax rates and simplified structure could boost disposable incomes, leading to increased consumer spending and economic growth.
- Concerns: Others point out that the removal of exemptions might discourage savings and investments, which have been traditionally promoted through tax incentives.
Historical Context: Major Income Tax Reliefs in the Past
To appreciate the significance of recent changes, it’s helpful to look at previous major income tax reliefs in India:
- 1997 “Dream Budget”: Then Finance Minister P. Chidambaram introduced significant tax cuts, reducing the highest marginal tax rate and simplifying tax structures, which led to increased compliance and revenue.
- 2014 Tax Exemption Increase: The basic exemption limit was raised from ₹2 lakh to ₹2.5 lakh, providing relief to individual taxpayers.
- 2019 Interim Budget: A full tax rebate was provided for individuals with taxable income up to ₹5 lakh under Section 87A, effectively making their tax liability nil.
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Anticipations for Budget 2025
As Budget 2025 approaches, several possibilities are being discussed:
- Further Enhancements to the New Tax Regime: To increase its adoption, the government might introduce additional incentives or further reduce tax rates.
- Adjustments in Exemption Limits: Raising the basic exemption limit or introducing new deductions could be considered to provide relief to taxpayers.
- Focus on Middle-Class Relief: Given the economic challenges, there might be targeted relief measures for the middle class to boost consumption and savings.
The landscape of income tax in India has evolved significantly over the years, with various reforms aimed at simplifying the system and providing relief to taxpayers. The introduction and subsequent enhancements of the New Tax Regime mark the latest major shifts in this domain. As Budget 2025 approaches, taxpayers are hopeful for further relief measures that balance the goals of simplicity, equity, and economic growth.
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