The Union Budget 2025-26, set to be presented on February 1, is sparking excitement with expectations of significant reforms in the income tax structure. According to media report, experts predict tax rate cuts, revised slabs, and a simplified tax system, which could boost demand, ease compliance, and offer relief to taxpayers, especially the middle class.
What Income Tax Changes You Can Expect?
Sameer Gupta, National Tax Leader at EY India, suggests that the Budget may kickstart the implementation of the much-debated Direct Tax Code. “While a comprehensive review may take time, initial steps towards its introduction could be seen. Reducing personal income tax for lower-income groups will offer relief and stimulate demand,” Gupta added.
HIGHER TAX EXEMPTION LIMIT
Subhash Chand Aggarwal, CMD of SMC Global Securities, anticipates further relief for individuals earning up to Rs 15 lakh annually. “Following the 2024 Budget’s trend, reducing tax rates for these earners could boost disposable incomes, fostering consumption and economic growth,” Aggarwal noted.
Under the current tax regime, incomes up to Rs 3 lakh are tax-free, with subsequent slabs taxed at 5%, 10%, 15%, 20%, and 30%. A standard deduction of Rs 75,000 effectively makes incomes up to Rs 7.75 lakh tax-free.
Reports suggest that the basic exemption limit may increase from Rs 3 lakh to Rs 4 or 5 lakh, with adjustments to other slabs. The 5% slab could then apply to incomes between Rs 4 lakh and Rs 7 lakh, benefiting individuals earning up to Rs 14 lakh.
TAX SLAB BOOST TO TACKLE INFLATION
Inflation has reduced consumers’ purchasing power, especially in urban areas where most taxpayers live. Aggarwal noted that sectors like FMCG have experienced slower value growth, dropping to 5.7% in July-September 2024 from 9% last year. He suggested that tax cuts could help reverse this by boosting disposable incomes and encouraging spending.
Sudhir Kapadia, Partner at EY India Tax & Regulatory Services, shared similar views. “Increasing each income tax slab by Rs 1 lakh could reduce tax burdens for urban taxpayers, who are most affected by inflation. This would likely stimulate consumption and support economic growth,” Kapadia said.
RESOLVING TAX DISPUTES
Apart from structural changes, the Budget may focus on resolving long-pending income tax disputes. EY India’s Budget expectation report highlights that over Rs 31 lakh crore is stuck in disputes as of 2023-24.
Suggestions include clearing Commissioner of Income Tax (Appeals) backlogs and enhancing alternate dispute resolution mechanisms like advance pricing agreements and safe harbours.
With rising inflation and slower GDP growth, the 2025 Union Budget faces the challenge of balancing tax relief with fiscal prudence. Proposed reforms in the income tax regime could deliver much-needed relief to taxpayers while supporting broader economic goals.
If implemented, these changes may not only provide relief to the country’s citizens but also spur growth in the future.