In an effort to simplify the tax system, the government introduced a new tax regime in 2020, offering concessional tax rates and removing certain deductions. This move was designed to streamline the tax process, providing individuals with lower tax liabilities and fewer complexities when filing their returns. For the fiscal year 2023-24, nearly 72% of taxpayers opted for this new tax regime, taking advantage of the simplified structure, which does not require the taxpayer to claim various exemptions and deductions available in the old tax regime. This shift marked a significant change in the country's tax landscape, reflecting a broad move toward modernization and ease of compliance for taxpayers.
In response to growing demand for tax relief, especially amidst rising inflation and economic pressures on households, the government is expected to make further adjustments in the upcoming Union Budget 2025. One of the anticipated changes is an increase in the basic exemption limit under the new tax regime, from Rs 3,00,000 to Rs 3,50,000. This increase would provide substantial relief to taxpayers, especially the middle class, by reducing their tax burden and increasing disposable income. The expected rise in the exemption limit could help boost consumer spending and stimulate demand in the economy, which has been under strain in recent years.
Additionally, while employer contributions to the National Pension Scheme (NPS) are currently tax-exempt under the new tax regime, individual contributions to NPS are not eligible for tax exemption under this regime. Taxpayers currently benefit from exemptions on NPS contributions under the old regime. The government may decide to extend this benefit to the new tax regime as well, thus encouraging more people to invest in their retirement savings through NPS. This step would also support the government’s larger goal of promoting long-term financial security for its citizens, helping individuals prepare for their post-retirement years.
Another significant change that could take place is an extension of the rebate under Section 87A. Currently, the rebate is available to individuals earning up to Rs 7 lakh per annum. Given the increasing cost of living, the government may extend this threshold to Rs 8 lakh, further reducing the tax burden on lower-income earners. This would bring immediate relief to the salaried class and make the tax structure more equitable by benefiting a larger segment of the population. The rebate under Section 87A is seen as a critical measure to enhance disposable income, especially for taxpayers in the lower income brackets.
In addition to changes in exemptions and rebates, the government may also introduce a new tax slab under the new tax regime. For individuals earning between Rs 15,00,000 and Rs 18,00,000, a 25% tax rate may be introduced, providing a more nuanced approach to tax collection. Those earning above Rs 18,00,000 could be taxed at a higher rate of 30%, which would ensure that higher earners contribute more to the nation’s coffers. This is seen as a progressive move to make the tax system more aligned with the principle of equity.
For the 28% of taxpayers who continue to opt for the old tax regime, there may be several modifications aimed at improving financial relief. One proposed change is the increase in the basic exemption limit from Rs 2,50,000 to Rs 3,00,000. This adjustment would offer additional tax relief to a significant portion of the population that still prefers the old regime due to the ability to claim deductions. Given the rising costs of living and higher expenses in urban areas, such changes are expected to provide much-needed financial relief.
Furthermore, due to the rising cost of education and other associated expenses, there are proposals to raise the limits for children's education allowance and hostel allowance. These allowances are typically claimed by parents to offset educational costs. The current limits of Rs 100 per month for education allowance and Rs 500 per month for hostel allowance could be increased to Rs 2,500 per month and Rs 5,000 per month, respectively. This increase would make these benefits more relevant in today’s economic context, where educational expenses are much higher than in the past. This move could also encourage better access to education for families, particularly those in the lower and middle-income groups.
Another area under consideration is the expansion of the Leave Travel Concession (LTC) exemption. Currently, the exemption under the old tax regime is limited to domestic travel, but the government may consider extending this exemption to international destinations. This would provide greater flexibility to individuals who travel abroad for personal or professional reasons and could potentially increase travel spending, which would boost the tourism sector.
In terms of housing, there could be significant changes to the House Rent Allowance (HRA) exemption. Cities like Bengaluru, Gurugram, Noida, Pune, and Hyderabad, which have some of the highest rental costs in the country, may qualify for a 50% capping limit under the HRA exemption. This would ensure that employees living in these high-rent cities are not disproportionately taxed compared to those in cities with lower living costs. Additionally, the government might consider extending the house loan interest deduction from Rs 2,00,000 to Rs 2,50,000. Moreover, the eligibility period for this deduction could be extended from five years to seven years from the date of acquisition of the property. This would help homebuyers by providing them with larger deductions over a more extended period, making home ownership more affordable.
All these proposed changes aim to reduce the tax burden on individuals while stimulating spending, saving, and investment in key sectors such as housing, education, and retirement savings. The expected adjustments signal the government’s ongoing efforts to make the tax system more progressive, equitable, and aligned with the changing economic realities. They also underscore the government's recognition of the need to support citizens, especially the middle and lower-income groups, in navigating the financial challenges of modern life. Ultimately, these measures, if implemented, would significantly improve the financial well-being of many taxpayers across the country, boosting overall economic growth and contributing to long-term national prosperity.
