Union Budget 2025: A Much-Needed Relief for the Middle Class and Taxpayers

The Union Budget 2025 arrived at a critical juncture for India’s economy, amidst global macroeconomic uncertainties, a weakening rupee, slowing growth, and volatile stock markets.

Taxpayers were eager to understand the government's direction in addressing these challenges. While India is relatively better positioned compared to many other countries, the ripple effects of global economic shifts are unavoidable.

There has been a growing sentiment within the country that recent budgets have failed to deliver significant relief to the middle class, except for the perfunctory ‘thank you’. There was widespread hope that the government would provide relief to the middle class like it had promised in the past.

Adding to the excitement was the upcoming Income Tax Bill, which was expected to simplify tax laws and reduce litigation.

Whilst the excitement for decoding the new Income tax Bill was put on hold as the Finance Minister announced that the same shall be announced in the next week, there was a ripple of euphoria when the key amendments for personal taxation were announced.

The Hon’ble Prime Minister hinted at the relief to be provided to the middle class in his address ahead of the Budget session where he said that “I pray that Maa Lakshmi continues to bless the poor and middle class of the country.” This was seen by many as a signal that the government was prepared to offer relief, especially to the middle-income groups. And true to expectations, the Budget 2025 came with key amendments in personal taxation aimed at making the default tax regime more attractive and offering real relief.

Key Announcements in Personal Taxation

1. A Gamechanger for the Middle Class: The New Tax Slabs and Rebate

The most significant reform in Budget 2025 is the overhaul of the personal income tax structure. There are two major changes:

• New Tax Slabs: The introduction of a 25% tax slab for incomes above Rs. 20 lakh and a revision of existing tax slabs.
• Tax Rebate for Lower Income Earners: A rebate will ensure that individuals earning up to Rs. 12 lakhs annually (Rs. 12.75 lakhs with the standard deduction) will pay no income tax.

The revised tax slabs under the proposed default tax regime are as follows:

This progressive tax structure is designed to put more money in the hands of individual taxpayers, stimulating consumption and potentially aiding in economic recovery. The marginal relief for those slightly above Rs. 12 lakh ensures that any nominal increase in income won’t result in a disproportionate increase in taxes.

Illustration:

*The above computed taxes do not include surcharge and education cess

However, it's pertinent to note that this revised taxation will not apply to income under capital gains which will continue to be taxed at their respective rates irrespective of the total taxable income in hands of the individual.

2. More Measures to Simplify the Tax Code and Free Up Money for Taxpayers

Beyond tax slabs, Budget 2025 also includes several other important reforms aimed at simplifying taxation and enabling taxpayers to keep more of their income:

A. Exemption for Withdrawals from National Savings Scheme (NSS) Senior citizens with older NSS accounts, where interest is no longer being paid from October 2024, were facing a dual issue of both low returns and tax liabilities on withdrawals. The new amendment proposes that any withdrawals made from these NSS accounts after 29 August 2024 (for which deductions were claimed before 1992) will not be subject to taxation. This provides relief and improves liquidity for many retirees.

B. Revisiting Employee Perquisite Limits The limits on perquisites (such as employer-paid medical expenses, travel allowances, etc.) were last updated decades ago, and were no longer in line with the current economic conditions. Budget 2025 proposes an increase in the limits for employees, which will benefit a large section of salaried individuals. This is a welcome move as the earlier limits were insignificant from an employee’s perspective and larger limits would be appropriate considering the current cost of living and expenses. It is pertinent to note that these amendments would not apply to any person who is a director of the company or a person who has substantial interest in the company.

C. Simplifying Self-Occupied Property Taxation Another notable change is the proposed simplification in the treatment of self-occupied properties. Taxpayers who own two self-occupied homes will now be able to claim both properties as nil (with no rent deemed for tax purposes) without the previous conditions. This is particularly beneficial for individuals with a holiday home or second property.

D. Clarification on ULIPs and Taxation of Redemptions Budget 2025 brings clarity to the taxation of Unit Linked Insurance Policies (ULIPs) redeemed after 1 February 2021. If the premium exceeds Rs. 2,50,000 annually, the policy will now be subject to capital gains tax. This ensures that taxpayers are aware of how their returns from ULIPs will be taxed.

E. NPS Vatsalya Deduction for Minor Children The extension of the deduction available under Section 80CCD to contributions made to the NPS Vatsalya scheme (introduced in September 2024) is a notable reform.

Conclusion: A Positive Step Forward for the Middle Class

Budget 2025 appears to be a gamechanger, especially for the middle class. The proposed amendments have made the default tax regime so much more attractive, that it would compel majority of the taxpayers to give up the old tax regime.

The government seems to be signalling a shift in its priorities, ensuring that those who are the backbone of the economy benefit. These proposed changes offer immediate financial relief, especially for salaried employees and senior citizens, and have the potential to stimulate consumption, which could be crucial for an economic recovery.

While the proposed amendments have been open heartedly welcomed by the taxpayers, it is earnestly hoped that the new Income tax bill promised to be announced in the next week truly reduces disputes and litigations thereby providing certainty to taxpayers.

All eyes will now be on how the government handles these reforms in practice and if the global macroeconomic conditions stabilize enough to allow these policies to reach their full potential. The road to economic recovery might still be uncertain, but these steps certainly provide a stronger foundation for it.

The views expressed in the article are the authors personal views and have no relation or bearing on the organization.

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