Driving The Consumption Spirit New Income Tax Reforms In The Budget 2025

Overview

Since February 1, 2025, Indian taxpayers are beaming with joy. The announcement of income tax relief in Budget 2025 has the potential to ease the tax burden for 7.28 crore taxpayers across the country¹. The key highlight of this relief was Finance Minister Nirmala Sitharaman’s announcement regarding zero income tax up to INR 12 lakhs and the revision of tax slab rates.

These tax norms will be applicable from the assessment year 2026-27 (that is, for the financial year 2025-26). Additionally, the Budget 2025 has also brought crucial reforms regarding deductions and rebates along with changes in the tax slabs. 

However, with widespread discussions online, these changes may seem confusing. Existing and potential taxpayers can refer to this article for a clear understanding of the revised income tax structure, provisions, and rates introduced in Budget 2025.ls. 

Tax Structure, Rebate And Deductions Before Budget 2025

Here are some key aspects of direct and indirect taxes before Budget 2025 that have been revised in the new Budget, along with the latest income tax reforms:

1. There are mainly two income tax regimes in India: Old and New. Individuals can opt for their desired regime based on their tax liability. Their structure and tax rates before the announcement of Budget 2025 were as follows:

2. A rebate can be claimed under section 87A to reduce the tax incidence. Individuals opting for the old tax regime would get INR 12,500 if their taxable income is under INR 5 lakhs. However, those opting the new regime would get an INR 25,000 deduction for taxable income below INR 7 lakhs.

3. Unlike the old tax regime, deductions were not allowed in the new tax regime. Only a standard deduction for salaried employees was allowed. It is INR 50,000 under the old regime and INR 75,000 under the new regime. 

4. 10% Tax Deducted at Source (TDS) will be deducted from the interest income from different sources with specific thresholds³. However, these thresholds are changed post Budget 2025. 

The Budget 2025 made significant changes in these aspects in terms of norms, rates and structure.

Personal Income Tax Reforms

Tax implications have a significant impact on the overall economy as they directly affect disposable income and consumption. Before the announcement of Budget 2025, the tax liability was high from the perspective of middle-class taxpayers. However, the new Budget income tax norms provide significant relief for investors with taxable income less than or equal to INR 12 lakhs.

Lower Tax Burden

Along with an increased rebate limit, the income up to this threshold becomes tax-free. The Budget 2025 changed the new tax regime slabs as follows:

As per the revised tax slabs, the rebate under Section 87A will be 100% for income up to INR 12 lakhs, excluding special rate income⁵. For salaried individuals, this threshold is INR 12.75 lakhs under Budget 2025. Special rate incomes, such as capital gains and lottery winnings, are taxed separately⁶.

Hypothetical Example For Tax Calculation

Taxpayers can clarify this calculation with the following hypothetical example:

Mr. K has a total taxable income of INR 14 lakhs, which has INR 2 lakhs of short-term capital gains from equities. He opts for the new tax regime.

The income of INR 12 lakhs will be taxed as follows:

Total Tax Amount = INR 60,000

Rebate under 87a = (60,000)

Tax liability = Nil

The rest amount earned from capital gains of INR 2 lakhs will be taxed as per the existing norms⁷. 

Short-term capital gains from equities = 20%

Tax on short term capital gains from equities = INR 40,000 (2 lakhs*20%)

Therefore, the total tax liability for Mr.K will be INR 40,000 only.

Before Budget 2025, Mr.K would not have been eligible to claim the rebate due to the INR 7 lakh limit.

Other Benefits

Along with direct tax reforms regarding main slab rates, some positive changes in deductions are also suggested in the Budget 2025. However, some deduction changes are only applicable to the investors opting for old tax regime slabs. Here are the key benefits in deductions and TDS.

1. Section 194 A: The threshold for TDS on interest income was increased to INR 50,000 for regular individuals and INR 1 lakh for senior citizens⁸.

2. HRA Benefits: The TDS was applicable for the house rent payment if it exceeds INR 2.4 lakhs per annum⁹. In the Budget 2025, this threshold was increased to INR 50,000 per month, that annually INR 6 lakhs. 

3. Section 80CCD(1B): Withdrawals from NPS Vatsalya dated after August 29, 2024, are exempted from tax payments.

4. Section 80 C: Withdrawals by senior and super senior individuals from the National Savings Scheme are exempted from tax payment if they are dated after August 29, 2024.

Due to the inapplicability of these deductions, new tax regime deductions will only be a standard deduction for salaried employees up to INR 75,000.

Corporate And Business Tax Reforms

The high emphasis on income tax in Budget 2025 was notable, while there was no specific mention about changes in the corporate tax¹⁰. However, throughout the Budget, the government has focused on several specific sectors through policies.  

Corporate Tax Rates

Due to no change in the corporate tax, domestic corporations whose turnover is less than INR 400 crores are liable to pay a 25% tax¹¹. The companies with a turnover exceeding INR 400 crores are taxed at 30%. However, the corporate tax of foreign companies operating in India was reduced to 35% in the Budget 2024¹².

GST Reforms And Compliance

The Goods and Service Tax (GST) has evolved to be reformative in recent years and is contributing significant revenue for the states. A recent economic survey states that GST was the main source of revenue for 23 states in India¹³.

In order to attract significant foreign capital and boost the manufacturing sector in the country, the ease of doing business is also focused in the budget 2025 proposals as follows:

1. Determine the block period for international transactions as 3 years to ease the transfer pricing and annual examination.

2. Clarify the international taxation norms.

3. Extension of tax holidays for eligible startups.

4. Extension of tonnage tax scheme for the eligible inland vessels.

5. Rationalisation of Tax Collected at Source (TCS).

Reward For Smart Taxpayers

The recent amendments in the direct personal tax structure can play a significant role in boosting disposable income and improving consumption in the country. Taxpayers can benefit from this reduced tax opportunity if they plan their income tax smartly and select the most suitable regime.

The New Tax Regime

Evident in the Budget 2025, the Budget 2025 income tax benefits are majorly for the tax calculation under the new regimes. Therefore, taxpayers can plan their taxable income to match the new tax regime norms. It will help them in the following ways:

• Income up to INR 12 lakhs will be tax-free with the rebate under section 87A.
• The new tax regime slabs have low tax rates and only specific deductions, like standard deductions and NPS. Therefore, investors may pay less tax with new deductible income.
• Moreover, the standard deduction for salaried individuals is high in the new tax regime.

Investments Can Save Your Tax

With the amendments to the new tax regime, taxpayers should not overlook the benefits of the old tax regime. Investments such as the Public Provident Fund (PPF), Equity-Linked Savings Schemes (ELSS), and life insurance continue to qualify for deductions, offering valuable tax-saving opportunities. 

Moreover, income less than INR 5 lakhs, along with capital gains from the investments, can be claimed as a rebate through section 87A under the old tax regime.

Final Thoughts

The Budget 2025 has introduced significant income tax reforms, impacting a large segment of the population. The increase in the tax liability threshold, enhanced rebates, and other provisions aim to reduce the tax burden and potentially boost consumption in the country. Beyond income tax changes, the ease of doing business reforms is another crucial aspect. Overall, Budget 2025 has instilled fresh confidence in India’s economic landscape.

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Frequently Asked Questions on Income Tax in Budget 2025

1. How is the rebate under section 87A calculated?Assume an individual has a taxable income of INR 12 lakhs under the new tax regime and it has INR 2 lakhs from special rate income. The tax on the remaining amount of INR 10 lakhs will be INR 40,000. Therefore, investors will not pay tax as the rebate limit is INR 60,000. These investors cannot claim rebates under the old tax regime as they exceed INR 5 lakhs.

2. What is the standard deduction in budget 2025?Salaried individuals get a standard deduction of INR 50,000 under the old regime and INR 75,000 under the new regime. No changes were made to these limits in the Budget 2025.

3. When do budget 2025 tax changes come into effect?

The tax changes under Budget 2025 will be applicable for financial year 2025-26, that is, for the assessment year 2026-27.

4. Who is eligible for an 87A rebate?

Investors with income under INR 5 lakhs opting for the old and new regimes (respectively) are eligible for income tax rebates. However, taxpayers opting for the new regime should not have special rate incomes like capital gains and income from the lottery to opt for this rebate

References

1. Press Information Bureau, Government of India, accessed from: https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2040669&reg=3&lang=1
2. Income Tax Department, accessed from: https://www.incometax.gov.in/iec/foportal/help/individual/return-applicable-1
3. Income Tax Department, accessed from: https://incometaxindia.gov.in/Pages/Deposit_TDS_TCS.aspx
4. Press Information Bureau, Government of India, accessed from: https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2098406
5. India Budget, accessed from: https://www.indiabudget.gov.in/doc/memo.pdf
6. India Budget, accessed from: https://www.indiabudget.gov.in/doc/memo.pdf
7. India Budget, accessed from: https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2035596
8. India Budget, accessed from: https://www.indiabudget.gov.in/doc/memo.pdf
9. India Budget, accessed from: https://www.indiabudget.gov.in/doc/memo.pdf
10. India Budget, accessed from:  https://www.indiabudget.gov.in/doc/budget_speech.pdf
11. Income Tax Department, accessed from:  https://www.incometax.gov.in/iec/foportal/help/company/return-applicable
12. India Budget, accessed from: https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2035618&reg=3&lang=1
13. Business Standard, accessed from: https://www.business-standard.com/budget/news/indirect-taxes-budget-2025-boosts-domestic-manufacturing-eases-tax-burden-125020200423_1.html

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