Budget 2025: Income Tax Payers Wishlist - Key Changes in New Tax Regime, Old Tax Regime

As Budget 2025 approaches, both businesses and individuals eagerly anticipate changes in policies, income tax laws, and government spending. While the government’s focus appears to be on simplifying income tax laws and expanding the tax base, taxpayers are hoping for reductions in their tax burden. Here’s a look at the expected changes in the income tax regime and their potential impact on individuals and businesses.

Changes Expected in the New Tax Regime
The government introduced the new tax regime in FY 2020–21 to encourage tax compliance. This system has seen positive adoption, with over 70% of individual taxpayers opting for the new tax regime for FY 2023–24, particularly those with taxable incomes below ₹7 lakh. These taxpayers benefited from zero tax due to the rebate under Section 87A. High-income individuals earning above ₹5 crore also enjoyed a lower tax rate under the new regime compared to the old one.

To further encourage compliance and expand the new tax regime's coverage, the government is likely to propose the following amendments:

1. Increased Standard Deduction: The standard deduction for salaried taxpayers may increase from ₹75,000 to ₹1 lakh, following the last revision in Budget 2024.

2. Simplified Tax Slabs: The number of income tax slabs may be reduced from six to three, and the highest tax rate may be lowered from 30% to 25%, aligning with the corporate tax rate.

3. Extension of Tax Rebate: The tax rebate under Section 87A could be extended to taxpayers with taxable incomes up to ₹10 lakh, up from the current limit of ₹7 lakh.

4. Interest Deduction for Housing Loans: To support the government’s "Housing for All" initiative, a deduction for interest on home loans up to ₹2 lakh may be introduced under the new regime. This benefit is currently available only under the old tax regime.

Changes Expected in the Old Tax Regime
While the new tax regime is gaining traction, the old tax regime may continue as an alternative for taxpayers. Although no major changes are anticipated, the following tweaks could benefit taxpayers who prefer the old system:

1. Higher HRA Exemption for Non-Metro Cities: Currently, the House Rent Allowance (HRA) exemption is capped at 50% of basic salary for cities like Delhi and Mumbai, while it is 40% for other cities. Emerging hubs like Bangalore, Pune, and Hyderabad may see the HRA exemption cap increased to 50%.

2. Tax Benefits on Fixed Deposits and Savings Accounts: Currently, Section 80TTA provides deductions only on interest from savings accounts. The government may extend this to include interest earned on term deposits, with the deduction limit potentially increasing to ₹50,000, matching the benefit available to senior citizens under Section 80TTB.

3. Income Tax Benefits for Electric Vehicles (EVs): The government may extend the deduction for interest on loans taken to purchase EVs. There may also be clarity on concessional tax treatment for employer-provided EVs.

4. Double Taxation on Provident Funds and Pension Contributions: Employer contributions exceeding ₹7.5 lakh to the Employees’ Provident Fund (EPF), Superannuation Fund (SAF), and National Pension System (NPS) are currently taxed at both contribution and withdrawal. The government may address this issue by providing specific exemptions at withdrawal.

Foreign Income and Tax Challenges
Taxpayers with foreign income face unique challenges, particularly with tax credits. Currently, resident taxpayers can claim credits for foreign taxes paid, but employers cannot consider these credits when deducting tax at source. Budget 2025 may introduce provisions allowing employers to account for foreign tax credits during tax deduction.

Additionally, taxpayers filing revised or belated returns encounter difficulties in claiming foreign tax credits. Since many countries follow the calendar year for tax reporting, the government may extend the deadline for filing revised or belated returns beyond December 31, making it easier to claim foreign tax credits effectively.

Budget 2025 is expected to introduce several significant changes to the tax regime, focusing on simplifying processes, broadening the tax base, and providing relief to taxpayers. With amendments in both the new and old tax regimes, the government aims to enhance compliance and reduce the tax burden on individuals. As the budget is finalized, these proposals will offer taxpayers clearer guidance for financial planning in the year ahead.