India’s Finance Minister oversees the creation of the Union Budget. It is one of the major publications which is of interest to taxpayers, businesses, and investors alike. Changes in income tax policy are of particular interest to citizens. The Union Budget for FY 2025 should be available to the public around 1st February 2025, during which they expect to see changes in the income tax policy. This appraisal attempts to cover what reforms are required, what allowances are made for taxation, and the economic reasons for such changes.

Explanation of the integrative system of taxation in India

As it currently is, the tax system in India has two broad categories. First is the old tax system, which allows taxpayers to obtain a wide range of incentives and deductions, as well as those provided under 80C, 80D, 80G. The second one is ‘new tax system’, introduced in the Budget 2020-2021. In this system, no incentives and deductions are allowed, but rates of taxation are lower than previous regimes. Taxpayers are at liberty to switch between both regimes, depending on their changing financial circumstances.

The old system is indeed more complex due to the rates of taxation being higher, however, those with substantial deductions tend to prefer it. On the contrary, the new tax regime is appealing as there is much less restriction in regard to deductions and investments.

The year 2025 has increased expectations for reforms in tax even among individual citizens, especially regarding income tax, which has gained a lot of attention. Here are some of the changes that are foreseen:

Changes in the Income Tax Brackets

Changes in income tax bracket is one of the most anticipated forecasts with regard to the Union Budget 2025. At this time, the income tax brackets in the new tax regime are set as follows:

Exempt – ₹0 to ₹2.5 lakh

5% – ₹2.5 lakh to ₹5 lakh

20% – ₹5 lakh to ₹10 lakh

30% – ₹10 lakh and over

It is believed that these tax brackets might change. There is an overarching feeling among tax payers that these rates are still tremendously high, especially for the middle income group. Hence there is widespread hope that the Finance Minister would actually increase the existing tax rates across the various slabs or at the very least consider changing the current limits, particularly for the higher earning brackets. At the same time, there are calls for an increased tax allowance limit which would benefit the working class.

Tax Relief for Middle-Class Taxpayers

There have been calls from the middle class in India regarding tax relief to improve disposable income and consumption. There is an impression that income tax slabs need modification, especially between the range of ₹5 Lakhs to₹10. It is believed that by lowering the taxation limit for middle income earners, domestic consumption expenditure, which has been one of the means of growth in the economy, will increase.

There are also suggestions of raising the limit for these tax saving instruments, which enables the individual to put away more money and therefore pay less tax. The government might also have to find a way to simplify the tax return system and decrease the amount of red tape ordinary people have to deal with.

Modifications of the New Tax Regime

The regime has been criticized with existence of tax allowances and tax deductions which ranges from minimal to zero value because many taxpayers rely on such systems. Government can enhance the regime by allowing exemptions and deductions with the aim of preserving the low tax rates. This would seek the attention of such individuals who are already accustomed to claiming these deductions under Section 80 C investments like provident funds, life insurance and under Section 80 D for insurance premium.

In order to push for greater return tax deductions in the new regime, the need to expand its appeal attractiveness to an even wider set of taxpayers, especially those who do not wish to lose these benefits in exchange of a simpler tax system.

Tax Benefits Related To National Pension Scheme (NPS) Contributions

National Pension Scheme (NPS) is gaining admiration as a means of long-term saving and retirement planning, that also offers tax benefits such as specified in the Section 80CCD(1) of the Indian tax system. Presently, any individual is qualified to deduct voluntary NPS contributions not exceeding ₹50,000 from income tax. There is also scope for enhancement of NPS contributions considering these adjustments in NPS would be more beneficial compared to other retirement plans like Employees’ Provident Fund (EPF).

The government may also consider further NPS tax benefits for contributors in the 2025 Union Budget. Such NPS advantages may include deductions with higher limits, and adjustments of rules governing withdrawals that would render the system to be an appealing retirement saving vehicle.

The Renewed Indexation Benefits on Long Term Capital Gains (LTCG)

One more change that is likely to be expected is the restoration of the indexation benefit to the Long Term Capital Gains (LTCG) tax. The rationale for such -vitiation is that it would be treated a relief measure to taxpayers to net off inflation and the attendant impact on the tax. The government has in the recent past moved the LTCG tax from 20% (with indexation) to 10% (without indexation) and this has not gone down well with the general investing public.

When it comes to inflation and its impact in the context of investing in specific range of years, there is every possibility that the Minister may look in to functional amendment of the capital gains tax so that the indexation relief benefit is more reasonably distributed. This will benefit the investors dealing in real estate, bonds, and equities.

Chances To File Income Tax With Increased Automation and Other Processes Simplified

Undoubtedly, the filing of income tax returns and the solutions for other expenditure issues is another significant change expected in the upcoming Union Budget. The overwhelming majority of individual taxpayers are not satisfied with the existing taxation systems in place as they view them as extremely complex and laborious and as a result, incur delays in return filing. There is a strong demand from both people and companies to adopt digitalised E-clean compliance methods of taxation which are easier and hassle free.

As a first step towards a streamlined system, the government will probably attempt to make the income tax return forms less tedious and encourage lay people with the design of the income tax portal user interface, as well as the tax payment and refund system.

Conclusion

In the next Union Budget of the year 2025, the Indian government shall focus on building a more tax-friendly structure that can also permit some level of tax relief for the middle-class citizens. During this budget, the Minister shall pay special attention to strategies that encourage investment in the country. Before the union budget is presented, there are certain issues such as changing income tax levels, the implementation of the new tax regime, increasing contributions caps for NPS and other alterations to the procedures of filing returns.

Generally, the actual changes in taxation will be part of the big reveal in the budget presentation; however, I am convinced these reforms shall help the government achieve its goals of boosting economic output within a fair and transparent system.

Tax payers, to include business owners and investors, are going to be keen to see whether the reforms needed for the Indian tax regime are implemented as outlined in the Union Budget 2025.

If you are interested for more: Exciting Anticipations for India’s Union Budget 2025: Date & Live Coverage Proposals In Union Budget Of 2025 Related To Income Tax Reforms