The Union Budget for 2025 has introduced significant reforms, especially in relation to growth in household consumption driven by higher disposable incomes and tax simplicity. Key revisions in income tax slabs, standard deductions, and further rationalization under TDS and TCS are expected to impact the middle class and small taxpayers. However, the question remains: do these reforms genuinely provide increased tax benefits? Let’s delve deeper into the details.
Income Tax Reforms: More Gains for the Middle Class
One of the most striking announcements in the budget was the increase in the tax-free income threshold to ₹12 lakh, which, with the standard deduction of ₹75,000 under the new tax regime, brings the threshold to ₹12.75 lakh. This is a significant leap from previous tax exemptions and aims to alleviate the financial burden on the middle class.
Key highlights:
- Up to ₹4 lakh will not attract any tax.
- The top slab for incomes above ₹24 lakh remains at 30% tax.
- For an individual earning ₹12 lakh, the entire ₹80,000 will be saved in tax.
- At ₹18 lakh, the tax saved will be ₹70,000, effectively saving 30% compared to previous tax rates.
These changes align with the government’s broader agenda of boosting consumption, as increased disposable income can result in higher spending, savings, and investments by taxpayers.
New vs. Old Tax Regime: Shift in Focus
The budget places a stronger emphasis on promoting the new tax regime, which favors simplicity over the older one that was more complex with numerous deductions and exemptions. According to Poorva Prakash of Deloitte India, this shift reduces administrative burdens on both employers and the government, simplifying the tax structure.
The salaried class stands to gain significantly from this simplified tax regime, while those who relied on multiple exemptions in the old regime may find themselves with fewer savings. This change signifies a structural shift in India’s taxation philosophy.
Rationalizing TDS & TCS to Reduce Compliance Burden
The finance minister also focused on simplifying TDS and TCS structures to reduce the compliance burden. Key proposals include:
- Increasing the tax deduction limit on interest income for senior citizens from ₹50,000 to ₹1 lakh.
- Raising the annual TDS threshold on rent from ₹2.4 lakh to ₹6 lakh to benefit small taxpayers.
- Eliminating double taxation on business transactions, preventing situations where both TDS and TCS apply to the same transaction.
- Increasing the TCS threshold on foreign remittances under the Liberalised Remittance Scheme (LRS) from ₹7 lakh to ₹10 lakh.
- Exempting TCS on education-related remittances, benefiting students and their families.
According to tax expert Akhil Chandna of Grant Thornton Bharat, these changes will not only simplify compliance but also ease the financial burden on taxpayers, especially small businesses and senior citizens.
Economic Impact: A Trade-Off Between Growth and Revenue
The government’s tax cuts and revisions are expected to result in a loss of around ₹1 lakh crore in direct taxes and ₹2,600 crore in indirect taxes. The expectation is that increased consumer spending will offset the loss in revenue through higher GST collections and an economic boost.
However, a potential drawback is the risk of expanding the fiscal deficit if economic growth does not meet expectations. The success of these reforms hinges largely on whether the additional disposable income results in higher consumption or simply increased savings.
Conclusion: A Balanced Approach with Future Implications
The Union Budget 2025 offers a balanced mix of benefits and challenges. It provides substantial tax relief, especially for small taxpayers, salaried employees, and senior citizens, while promoting a shift towards a consumption-driven economy with a simplified tax structure. However, those who have benefited from exemptions under the old regime may need to reassess their tax planning strategies.
The new tax structure represents a long-term vision by the government to reduce complexity and foster a consumption-driven economy. Only time will tell whether the increased disposable income will translate into the economic boost the government has anticipated.
About the Author
Mr. Bajaj holds the position of Group Director for CAD at the Aditya Birla Group and serves as a Board Member at Living Media, affiliated with the India Today Group. He brings a wealth of leadership experience, having formerly been the Director at Essar Group. Mr. Bajaj is recognized for his strategic insights and a strong commitment to innovation.
