Mr. Hitesh Sharma (Partner, Vialto Partners) and Mr. Dhruv Anand (Director) present a detailed analysis of all the personal tax related announcements and their potential impact on different segments of taxpayers. Inter alia highlighting that marginal relief ensures that the additional tax liability is proportionate to the excess income, preventing an unfair tax burden, they outline the effective tax rate as per Budget 2025 for various income groups. The authors conclude by positing that, “For taxpayers, the key takeaway is to reassess their financial planning strategies in light of these changes. Those in lower and middle-income groups will benefit the most, while high earners may need to explore tax-efficient investment options.”

“Union Budget 2025: Key Personal Tax Proposals & Their Impact on Individual Taxpayers”

The Union Budget for FY 2025-26, presented by Finance Minister Nirmala Sitharaman on February 1, 2025, has proposed significant changes to India's personal income tax framework. With a focus on simplifying taxation, easing compliance, and putting more money in the hands of taxpayers, the budget has been widely discussed across various economic and financial circles. This article provides analysis of the personal tax-related announcements and their potential impact on different segments of taxpayers.

Income Tax Slabs Revised Under New Regime

A major highlight of the budget is the revision of income tax slabs and rates under the new tax regime. This move aims to encourage taxpayers to shift towards the simplified tax structure and reduce reliance on deductions and exemptions under the old regime.

New Tax Slabs for FY 2025-26 (New Regime)

Income Range (₹)	Tax Rate (%)
0 – 4,00,000	0%
4,00,001 – 8,00,000	5%
8,00,001 – 12,00,000	10%
12,00,001 – 16,00,000	15%
16,00,001 – 20,00,000	20%
20,00,001 – 24,00,000	25%
Above 24,00,000	30%

Rebate Under Section 87A – Zero Tax on Income up to ₹12 Lakh

The tax rebate under Section 87A has been enhanced, ensuring that resident individuals earning up to rs.12 lakh annually will pay zero tax. Previously, this rebate was applicable only for incomes up to rs. 7 lakh.

This is a major relief for lower and middle-income taxpayers who are resident in India, effectively keeping them out of the tax net without requiring complex tax-saving investments.

The said rebate is not available on income from capital gains or lotteries or any other income on which special rate has been provided in the Income Tax Act.

Marginal Relief

Under the new tax regime, individuals with income up to rs.12 lakh are eligible for a full rebate under Section 87A, meaning no tax is payable. However, if their income exceeds rs.12 lakh, they face tax on the entire taxable portion, potentially leading to a significant increase in tax liability if the income exceeds rs.12 lakh by even a small amount.

Marginal relief ensures that the additional tax liability is proportionate to the excess income, preventing an unfair tax burden.

Let’s consider the case of a taxpayer with an income of rs.12,50,000:

The taxpayer's income exceeds rs.12 lakh, so the rebate under Section 87A is no longer available, and tax is applicable on the entire amount.

Tax without marginal relief: Tax on rs.12,50,000 = ₹67,500

In this case, the taxpayer's income has increased by ₹50,000, but their tax liability increases by rs.67,500, which seems disproportionate. To address this, marginal relief is applied:

Excess income over rs.12,00,000: rs.12,50,000 – rs.12,00,000 = rs. 50,000

Additional tax liability before relief: rs. 67,500

Marginal relief: The tax payable will be adjusted to ensure that the increase in tax does not exceed the increase in income (rs. 50,000). After applying marginal relief, the tax payable will be adjusted so that it does not exceed the excess income of rs. 50,000. The final tax payable is capped at rs. 50,000.

Marginal relief ensures that taxpayers with income just above the prescribed threshold of rs. 12,00,000 are not subjected to an unfair tax burden.

Effective Tax Rate as per Budget 2025

Annual Income (₹)	Effective tax rate	Tax saving
12,00,000	0%	83,200
16,00,000	7.5%	52,000
18,00,000	8.8%	72,800
20,00,000	10%	93,600
25,00,000	13.2%	114,400
50,00,000	21.6%	114,400

Changes in threshold for perquisite taxation

The Finance Budget 2025 has proposed that –

the salary income threshold (currently rs. 50,000) for perquisite taxation of free or concessional benefits; and

the gross total income threshold (currently rs. 2,00,000) for perquisite taxation of travel outside India for medical treatment of the employee or family members

will be increased, expanding the exemption to a larger group of employees. The revised thresholds will be prescribed separately.

Changes in Provision for Annual Value of Self-Occupied Property

The Finance Bill 2025 brings a significant simplification to the taxation of self-occupied property by relaxing the conditions for determining the annual value as Nil under Section 23(2) of the Income Tax Act, 1961.

Previously, the annual value of a self-occupied property was considered Nil if it was occupied by the owner for personal residence or if the owner could not reside in the property due to professional, business, or employment-related reasons. This condition restricted the tax benefit to only those individuals who could not reside in the property due to specific professional commitments.
However, the Finance Bill 2025 has now relaxed this provision. The annual value of a self-occupied property is considered Nil if it is occupied by the owner for his own residence or if the owner cannot occupy the property for any reason. The earlier condition, which required the owner to be unable to reside in the property due to business or employment reasons, has been removed.

Clarity on taxation on redemption of Unit Linked Insurance

The Finance Budget 2025 brings clarity to the tax treatment of Unit Linked Insurance Policies (ULIPs) by resolving the ambiguity regarding the taxability of sums received on redemption. Previously, if the premium paid on a ULIP exceeded 10% of the sum assured, the sum received on redemption was taxable. However, this created confusion regarding the applicable tax head.
The amendment now clarifies the tax treatment of ULIPs. If the exemption under Section 10(10D) does not apply, the amount received from ULIPs will be taxed as capital gains.

Deductions for contributions made to the NPS Vatsalya

The Finance Bill 2025 extends the eligibility for tax deductions (only in old regime) under Section 80CCD to parents and guardians contributing to their minor children’s NPS Vatsalya accounts. The deduction is capped at the existing overall limit of rs.50,000. Taxation of withdrawal from such accounts is now proposed to be aligned with NPS.

Withdrawals from National Savings Scheme (NSS)

The Finance Budget 2025 brings a significant change to the National Savings Scheme (NSS) by allowing tax exemption on withdrawals made after August 29, 2024. Prior to this, Section 80CCA allowed deductions for contributions made to NSS, but withdrawals during the taxpayer's lifetime were taxed if deductions were claimed. A notification issued on August 29, 2024, clarified that no interest would be paid on NSS deposits after October 1, 2024. With the proposed amendment, individuals can now withdraw their funds without facing a tax liability, provided the withdrawal is made after the specified date.

Revised TCS Rates Under RBI's Liberalised Remittance Scheme (LRS)

Transaction Type	TCS Rate Before Budget 2025	TCS Rate After Budget 2025
Foreign remittance for education (loan-funded)	0.5% (above rs.7 lakh)	NIL
Foreign remittance for education (self-funded)	5% (above rs. 7 lakh)	5% (above rs.10 lakh)
Other foreign remittances (investment, gifts, etc.)	20% (above rs. 7 lakh)	20% (above rs.10 lakh)

This revision reduces the upfront tax burden for individuals making foreign payments, particularly those remitting money for education or travel.

Tax Deducted at Source (TDS) Reforms

The budget has introduced several key changes in TDS and TCS provisions to simplify compliance:

Section	Nature of payment	TDS rates	Existing threshold (per annum)	Proposed threshold (per annum)
193	Interest on securities	10%	Nil	rs. 10,000
193(v)(a)	Interest on any debentures of a public company	10%	rs. 5,000	rs. 10,000
194	Dividend paid to an individual shareholder	10%	rs. 5,000	rs. 10,000
194A	Interest other than interest on securities paid by banks/ co-operative society/ post offices to:
	-  Senior citizens	10%	rs. 50,000	rs. 1,00,000
	-  Other individuals	10%	rs. 40,000	rs. 50,000
	-  Any other payee	10%	rs. 5,000	rs. 10,000
194B	Winnings from lottery / crossword puzzle / card game / any other game	30%	rs. 10,000	rs. 10,000 in respect of a single transaction
194BB	Winnings from horse races
194D	Insurance commission	2%	rs. 15,000	rs. 20,000
194G	Income by way of commission, prize etc., on lottery tickets	2%	rs. 15,000	rs. 20,000
194H	Commission or Brokerage	2%	rs. 15,000	rs. 20,000
194I	Rent payment by a person other than an individual or HUF	10%	rs. 240,000	rs. 50,000 per month/ part of the month
194J	Fees for professional / technical services/ royalty	10%	rs. 30,000	rs. 50,000
194K	Income in respect of units of a mutual fund or specified company or undertaking	10%	rs. 5,000	rs. 10,000
194LA	Payment of enhanced compensation on compulsory acquisition of immovable property	10%	rs. 250,000	rs. 5,00,000

These changes aim to reduce the compliance burden on small taxpayers while ensuring that tax collection remains efficient.

Removal of Higher TDS /TCS for Non-filers of Return of Income

The Finance Budget 2025 proposes the omission of Sections 206AB and 206CCA of the Income Tax Act, effective from April 1, 2025, bringing significant changes to the tax deduction and collection processes.

Under Section 206AB, higher TDS rates were mandated for non-filers of income tax returns (ITR), while Section 206CCA imposed similar provisions for higher TCS rates for non-filers. The rationale behind these provisions was to encourage tax compliance by levying additional taxes on individuals who have not filed their returns. However, identifying whether a person has filed their return was challenging for deductors and collectors, leading to uncertainty and higher compliance burdens for them.
The proposed removal of these sections aims to simplify compliance for tax deductors and collectors, eliminating the need to determine the filing status of individuals. This change is expected to reduce operational difficulties and enhance ease of doing business.

However, it is important to note that the higher rates of TDS/TCS will still apply in cases of invalid PAN or non-PAN situations, ensuring that the mechanism for tackling tax evasion in such cases remains intact.

Extension for Filing Updated Tax Returns

To encourage voluntary compliance, the government has extended the time limit for filing updated tax returns from 2 years to 4 years with additional income tax payment of 60-70% of tax.

Timelines for updated tax return [from end of relevant Assessment Year]	Additional income tax [on tax and interest due]
Up to 12 months	25%
After 12 months but before 24 months	50%
After 24 months but before 36 months	60%
After 36 months but before 48 months	70%

This proposal is expected to:

• Reduce litigation and disputes with tax authorities.
• Help honest taxpayers rectify mistakes without severe penalties.

New Direct Tax Bill

One of the most anticipated announcements in the budget is the government's plan to introduce a New Direct Tax Bill by the second week of February 2025. The bill is expected to:

• Replace the Income Tax Act, 1961 with a modern, streamlined structure.
• Reduce the complexity of deductions, exemptions, and tax rates.
• Align India's tax system with global best practices.

This is a significant step towards overhauling the direct tax system.

Who Gains the Most from These Changes?

The revised tax structure primarily benefits:

• Salaried and middle-class individuals – Higher standard deduction and revised slabs mean lower tax outflows.
• Senior citizens – Higher TDS exemption on interest income allows better post-retirement cash flow.
• Self-employed professionals – Simplified TDS and compliance measures reduce administrative burdens.
• Small landlords – Higher TDS threshold on rent means fewer compliance requirements.

However, high-income earners (above ₹25 lakh annually) may not see significant tax relief as the 30% bracket remains unchanged.

Economic and Fiscal Impact

From an economic perspective, these tax measures are expected to:

• Boost disposable income and consumption – Higher tax reliefs/exemptions mean more spending power for individuals.
• Improve tax compliance – Longer return-filing windows and reduced penalties encourage voluntary compliance.
• Increase savings and investment – Tax-free NSS withdrawals, deduction for NPS Vatsalya and higher TDS thresholds encourage long-term financial planning.

The only concern is potential revenue loss for the government due to lower tax collections, which may need to be compensated through higher indirect tax collections (outcome of potential increase in consumption demand) or increased tax base expansion.

Conclusion: A Balanced Budget with Focus on Taxpayer Relief

The Union Budget 2025-26 brings much-needed tax relief to individual taxpayers while ensuring that compliance remains simple and fair. By revising tax slabs, increasing deductions, and introducing long-term structural changes, the government aims to balance fiscal discipline with economic growth.

For taxpayers, the key takeaway is to reassess their financial planning strategies in light of these changes. Those in lower and middle-income groups will benefit the most, while high earners may need to explore tax-efficient investment options.