Union Budget 2025: Income Tax Relief Explained

Introduction

As the Union Budget 2025 approaches, scheduled for February 1, expectations among taxpayers are high. Rising inflation and increased living costs have amplified calls for income tax relief, particularly for salaried individuals who seek financial respite. Over the years, India's income tax framework has seen periodic revisions, balancing simplicity with benefits. Let's delve into the recent developments, historical context, and expert views to understand the journey of income tax reforms in India and what we might expect in the upcoming budget.

Key Highlights from the Last Union Budget

The Union Budget 2023 focused on improving the new tax regime while leaving the old tax regime unchanged. Here are the major updates:

Standard Deduction Increased:The standard deduction for salaried taxpayers under the new tax regime was raised from ₹50,000 to ₹75,000.
Individuals earning ₹15.5 lakh or more benefited from tax savings of up to ₹52,500.

Widened Income Tax Slabs:Two income tax slabs under the new regime were adjusted, making the system more appealing for taxpayers with specific income levels.

Emphasis on the New Tax Regime:The government continues to position the new tax regime as a simplified alternative to the old regime, encouraging a shift by offering lower tax rates but without traditional exemptions like Section 80C or 80D deductions.

Historical Evolution of Income Tax Relief

Income tax relief in India has undergone significant transformations over the years.

Abolition and Reinstatement of the Standard Deduction:In 2005, the standard deduction was abolished. Previously, employees could deduct ₹30,000 or 40% of their salary (whichever was lower).
Budget 2018 reinstated the standard deduction at ₹40,000.
It was subsequently raised to ₹50,000 in the Interim Budget 2019 and further expanded to ₹75,000 in Budget 2023.

Introduction of the New Tax Regime (Budget 2020-21):A landmark reform, this optional tax regime introduced lower rates while eliminating common deductions.
Benefits middle-income taxpayers who do not claim exemptions, simplifying tax calculations.

Finance Act 2024 Adjustments:Basic tax-free income slab limits expanded.
Long-term capital gains tax reduced from 20% to 12.5%, though indexation removal made this less advantageous for certain taxpayers.

Global Comparison of Tax Rates

India's income tax rates are moderate compared to global standards:

• India: Top marginal rate of 39% under the new tax regime.
• United Kingdom: 45% top tax rate.
• United States: Maximum of 37%.
• Australia, Germany, Japan: ~45%.

Despite being moderate, India's tax system faces unique challenges due to a lower basic exemption limit (₹3.5 lakh) compared to countries like Singapore, where the equivalent limit is ₹6-7 lakh.

Expert Opinions and Economic Suggestions

Economists and tax experts emphasize the need for further reforms in Budget 2025 to stimulate economic growth:

Increase Disposable Income:Lowering income tax rates could boost purchasing power, drive consumption, and support demand recovery in key sectors.

Simplify Tax Structures:Expanding the tax-free income threshold and rationalizing rates can reduce financial strain on taxpayers, particularly the middle class.

Aligning with Global Standards:Adjusting India’s effective tax rates to be more competitive internationally could attract foreign investments and support growth.

Expectations for Union Budget 2025

Given the backdrop of inflation and economic recovery, here are some anticipated measures:

Enhanced Exemption Limits:Raising the basic exemption limit under both tax regimes.

Focus on Savings and Investments:Incentivizing savings through new schemes or enhanced deductions under Section 80C.

Sector-Specific Relief:Tax benefits for industries impacted by slow demand, such as real estate or manufacturing.

Relief for Salaried Individuals:Further increasing the standard deduction or offering additional benefits for employees.

Conclusion

The upcoming Union Budget 2025 presents an opportunity for the government to address taxpayers' concerns, particularly in the context of rising costs and economic recovery. Recent reforms, like expanding the scope of the new tax regime and reducing capital gains tax rates, have laid the groundwork for further simplification and relief.

As salaried individuals and experts eagerly await February 1, 2025, it remains to be seen how the government balances fiscal responsibility with the need to enhance purchasing power and boost economic growth.