Income Tax in India: Will Modi Budget 2025 make the new tax regime more attractive?

With the Budget 2025 approaching, discussions have surfaced about potential income tax relaxations as the center plans to incentivise the new tax regime which offers lower rates but fewer exemptions and deductions.

Finance Minister Nirmala Sitharaman may announce the inclusion of NPS deductions under the new tax regime on February 1, a benefit currently limited to the old regime. The Union Finance Minister is set to present the Budget for 2025-26 in the Lok Sabha on February 1, 2025.

An ET report indicates that the government is considering measures to make the new tax regime more appealing, encouraging taxpayers to adopt it. The Budget may raise the standard deduction limit under the new regime from ₹75,000 to ₹1 lakh. According to Reuters, the central government is also expected to reduce income tax for individuals earning up to ₹15 lakh annually.

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In the previous Budget 2024-25, several steps were introduced to enhance the new tax regime’s attractiveness. The standard deduction limit was increased from ₹50,000 to ₹75,000, and tax slabs were revised, resulting in savings of ₹17,500 for salaried individuals. The new tax regime was also made the default system, while the old regime remained unchanged.

Currently, taxpayers can choose between the old tax regime, which includes numerous exemptions and deductions, and the new regime, which provides lower rates but lacks deductions.

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In the 2024-25 Budget, Sitharaman also announced a comprehensive review of the Income Tax Act, leading to the formation of a review committee chaired by Chief Commissioner of Income Tax V K Gupta. According to a PTI report, the government is expected to introduce a new income tax bill during the 2025 budget session.

The Income Tax Act, 1961 governs direct taxes such as personal income tax, corporate tax, securities transaction tax, and gift and wealth tax. It currently contains 298 sections across 23 chapters. The government reportedly aims to reduce the Act’s volume by nearly 60% to simplify compliance.

With inputs from agencies