The much-anticipated Union Budget 2025 is just around the corner, scheduled to be presented on February 1, 2025. For salaried individuals, hopes are high for some much-needed income tax relief, as rising inflation and escalating living costs have taken a toll on household finances. But when was the last time taxpayers got a significant breather? Let’s dive in and explore the history, expectations, and possibilities surrounding this year’s budget.
Why Is Income Tax Relief Such a Hot Topic?
Let’s face it, who wouldn’t want to keep more of their hard-earned money? With inflation squeezing budgets tighter than ever, tax relief is one way the government can ease financial pressures. Economists have been vocal about the need to cut income tax rates, as such measures could increase disposable income, encourage savings, and even stimulate spending—all of which would give the economy a much-needed boost.
What Economists Are Saying
In a pre-budget meeting with Prime Minister Narendra Modi, experts suggested bold moves like reducing tax rates. Their reasoning? More disposable income means higher spending on essentials, which could help revive sluggish consumption in key sectors. A reduction in taxes could also encourage savings and investments, sparking broader economic growth.
What Changed in the Last Budget?
While the 2024 Union Budget didn’t make changes to the old tax regime, it did tweak the new tax regime to make it more appealing. Here are the highlights:
- Wider Tax Slabs: Two income tax slabs were broadened, giving taxpayers a bit more breathing room.
- Standard Deduction Increased: Under the new regime, the standard deduction was bumped up from Rs 50,000 to Rs 75,000.
The standard deduction—a fixed amount subtracted from taxable salary—is a small but significant way to ease the financial burden for employees. It was first abolished in 2005 but reintroduced in 2018, starting at Rs 40,000, then gradually increased to Rs 50,000 in 2019. The 2024 Budget’s increase to Rs 75,000 marked a notable improvement.
Breaking Down the Standard Deduction
Think of the standard deduction as a safety cushion for taxpayers. It helps cover common work-related expenses without the need for complicated paperwork. In the 2024 Budget, taxpayers earning Rs 15.5 lakh or more saw a tax benefit of Rs 52,500—a meaningful amount for many middle-class families.
The Last Major Income Tax Relief
According to Ajinkya Gunjan Mishra, Tax Partner at S&R Associates, the last significant income tax relief came during the Union Budget 2020-21. This budget introduced an optional personal income tax regime with lower tax rates. But there was a catch—to take advantage of these lower rates, taxpayers had to forgo popular exemptions and deductions under Sections 80C and 80D.
The goal? Simplify the tax system and offer relief to middle-income earners. “The introduction of reduced tax rates under the optional regime particularly benefited middle-income taxpayers who don’t claim deductions or exemptions,” Mishra explained.
How Does India’s Tax Structure Compare Globally?
India’s income tax structure is considered moderate by global standards. For instance:
- India’s basic exemption limit is Rs 3.5 lakh, compared to Singapore’s Rs 6-7 lakh equivalent.
- In Europe, many countries offer lower thresholds for exemptions.
The new tax regime expanded the basic tax-free income slab limits, reduced tax rates at certain levels, and raised the standard deduction. These changes improved liquidity for middle-class taxpayers and enhanced their purchasing power.
Long-Term Capital Gains Tax Reforms
Another notable change came in the form of reduced long-term capital gains tax rates—from 20% to 12.5%. While this seemed like a win, the removal of the indexation clause tempered the excitement. Why? Without indexation, the adjusted cost of long-term assets couldn’t be accounted for, leading to higher taxable gains in some cases.
Impact on Disposable Income
The simplified tax options under the new regime have increased liquidity for taxpayers, especially those in the middle class. Mishra and Dipesh Jain, Partner at Economic Laws Practice, both noted the positive effects on disposable income and consumer spending. “The changes have significantly boosted purchasing power, which in turn supports the economy,” Jain said.
India’s Top Marginal Tax Rate: How Does It Stack Up?
India’s top marginal tax rate under the new tax regime is 39%, aligning with global averages:
- UK: 45%
- US: 37%
- Australia, Germany, and Japan: Around 45%
Experts suggest that rationalizing these rates further could increase purchasing power and fuel economic growth.
What Could Budget 2025 Bring?
So, what’s on the wishlist for Budget 2025? Here are a few possibilities:
- Lower Income Tax Rates: A reduction in rates would directly impact disposable income.
- Increased Standard Deduction: Further raising this amount would provide relief to salaried individuals.
- Tax-Free Slabs Expansion: Pushing the basic exemption limit higher could help low-income earners.
- Reintroduction of Indexation for Long-Term Gains: This would make tax calculations fairer for investors.
Read More: Rohit Sharma Retirement: Is It Time for the Indian Captain to Say Goodbye?
Conclusion
The Union Budget 2025 carries high expectations, and with good reason. The rising cost of living has put immense pressure on households, making income tax relief more critical than ever. If the government listens to economists and taxpayers alike, this year’s budget could bring meaningful changes to ease financial burdens and stimulate economic growth.
As February 1 approaches, one thing is clear: taxpayers are eager for reforms that leave more money in their pockets. Will this budget deliver? We’ll find out soon enough.
