The Budget season is here once again! It’s a crucial time for businesses and individuals who are anticipating changes in policies, income tax, and government spending. For Budget 2025, the government’s focus appears to be on simplifying income tax laws and broadening the income tax base, while individuals are hoping for a reduction in their tax liabilities.
Here are some potential changes in the tax proposals for Budget 2025:
Changes Expected in the New Tax Regime
To encourage more taxpayers to file returns and comply with income tax laws, the government introduced the new tax regime starting FY 2020-21. The regime has been beneficial for many, with over 70% of individual tax filers opting for it in FY 2023-2024, particularly those with taxable income under Rs 7 lakhs, who benefitted from a NIL tax due to the Section 87A rebate. Taxpayers with taxable income above Rs 5 Cr also saw a reduced total tax rate of 39% (including surcharge and cess) under the new regime, compared to 42.744% in the old tax regime.
For FY 2023-24, out of the 12.79 crore individual taxpayers registered on the income tax portal, only 8.68 crore filed their Income Tax Returns (ITR).
To boost taxpayer compliance and expand the new tax regime’s coverage, the government may consider the following amendments:
- Increase in Standard Deduction: For salaried taxpayers, the standard deduction could be raised from Rs 75,000 to Rs 1 lakh. This was last increased in Budget 2024, when it was raised from Rs 50,000 to Rs 75,000.
- Simplification of Tax Slabs: The government may simplify and reduce the income tax slabs from six to three and cut the highest tax rate from 30% to 25%, bringing it in line with the general corporate tax rate.
- Extension of Tax Rebate under Section 87A: The tax rebate could be extended to taxpayers with taxable income up to Rs 10 lakh, increasing the current limit of Rs 7 lakh.
- Deduction for Home Loan Interest: In alignment with the government’s ‘Housing for All’ agenda, a new deduction for interest on loans (up to Rs 2 lakh) for self-occupied house property could be introduced under the new tax regime. Currently, this deduction is available only in the old tax regime.
Long-Awaited Tweaks in the Old Tax Regime
While the government is primarily focused on the new tax regime, significant changes to the old tax regime are unlikely. However, if the old tax regime remains as an alternative for a few more years, several key adjustments that have been on taxpayers’ wishlists for some time could be considered:
- Higher exemption for rent paid in non-metro cities
HRA exemption is available up to 50% of basic salary for rented accommodation in Delhi, Mumbai, Chennai and Kolkata whereas the exemption is capped at 40% of basic salary for other cities.
Cities such as Bangalore, Pune, Hyderabad, Gurgaon have evolved into major economic and technological hubs, comparable to traditional metro cities such as Mumbai, Delhi, and Chennai. Hence, the HRA exemption cap for these cities needs to be enhanced to 50% of basic salary.
- Tax benefit for interest on savings accounts and fixed deposits
When interest rates on savings accounts are low and inflation erodes the purchasing power of money, taxpayers typically move funds to fixed-term deposits to earn higher returns on their savings. Hence, to incentivize savings, the government could extend the deduction under Section 80TTA, which is currently restricted to interest on savings accounts, to the interest on term deposits and increase the limit under this section to Rs 50,000. This will be in line with the deduction available for senior citizens under Section 80TTB.
- Income tax benefits on buying Electric Vehicles (EV)
EVs are paving the way for a greener future and availability of better infrastructure has propelled EV sales in India. An employer-provided car enjoys concessional tax treatment as per the Income tax rules. However, there is currently some uncertainty on whether the benefit covers an electric car, as well. Explicit provisions around this could encourage employers to include electric cars in their car-lease schemes and drive up the demand for EVs further.
A deduction of up to Rs 1,50,000 per annum (from gross total income) was available for interest on loans taken until March 31, 2023, for individuals for the purchase of an EV. The government could extend the time limit for this deduction further to encourage taxpayers to opt for EVs when buying vehicles.
- Double taxation on NPS, EPF and SAF
An employer’s contribution to an Employees’ Provident Fund (EPF), superannuation fund (SAF) and National Pension System (NPS) in excess of Rs 750,000 is taxable in the year of contribution. The same PF/superannuation fund balance will be taxable at the time of withdrawal if the conditions for exemption (for e.g., 5 years of continuous service) are not complied with. There is a need for a specific exemption at the withdrawal stage to exclude the income that is already taxed in the year of contribution. In the absence of any such law, a double taxation of the same income arises, which is unlikely to be the intention of the law.
- Foreign income related challenges
Foreign Tax Credit (FTC) should be allowed to be considered by employer for TDS:
A resident taxpayer can claim credit for taxes paid overseas in his ITR filed along with Form 67. However, if the same income, say salary, is also subject to tax and TDS in India, there is currently no enabling provision to factor credit for overseas taxes at the time of deducting tax at source on salary income by the employer. Specific provisions for the employer to factor credits for overseas tax while deducting tax in India could help such taxpayers avoid the hassles of paying tax in both countries and then claiming a tax refund.
Extending the due date for filing belated or revised tax returns beyond December 31
Taxpayers face issues in claiming the credit for tax paid in foreign countries while filing ITR in India as many overseas countries follow the calendar year as their tax year. Typically, an Indian ITR would be revised to reflect the overseas tax return position after the overseas tax return is filed. With the revised return deadline now advanced to 31 December of the assessment year, the overseas return in most cases is not available with the result that taxpayers have to forgo tax credits. To address this challenge, the due date for filing a revised / belated return should be extended beyond 31 December of the assessment year.