This was a historic 8th budget for Finance Minister Nirmala Sitharaman, the second of Modi Government 3.0, and finally, the middle class has been appeased. The Government has acknowledged that the middle class is providing strength for India’s growth.

The Government introduced a new taxation regime for individuals a couple of years back without any deductions or incentives. Individuals could optionally apply the old regime or the new tax regime. However, the new tax regime was made the default regime of taxation, indicating that the government wanted to promote the new tax regime.

In the current budget, the Government has further amended the new regime to reduce taxes, especially keeping the middle class in focus and leaving more money in their hands, boosting household consumption, savings, and investments. This article delves into the most significant changes to personal income tax introduced in Budget 2025.

1. New income tax slabs under new tax regime

New Tax Slabs under the New regime proposed to be applicable from Assessment Year (AY) 2026-27 i.e., the financial year (FY) 2025-26, along with a comparison with earlier tax regime is given below-

The proposed amendment makes the new regime lucrative, especially for income groups upto INR 24 lakhs salary. In the new regime, the standard deduction from salary continues to be INR 75,000.

The increased tax slabs may make the new regime attractive to a lot more as the income difference to break even the tax liability under both regimes are now roughly INR 8 lakhs. In other words, if an individual has eligible deductions under various sections (e.g. LTA, HRA, investment in PF, and other saving schemes under section 80C, and housing loan interest, etc.) totaling to INR 8 lakhs or more, the old regime remains beneficial.

2. Rebates offered under section 87A

Apart from the above slab rate changes, the tax rebate as per Section 87A of the Income tax Act, applicable for income upto INR 7 lakh, has been enhanced to INR 12 lakh. Considering the standard deduction available for salaried persons and rebates in the new tax regime, taxpayers with an income upto INR 12.75 Lakhs will have no tax liability as per the new regime. They will get the benefit of INR 80,000 in tax rebate (which is 100% of tax payable as per existing rates). However, the rebate is not applicable against income chargeable at a special rate of tax, like income from capital gains, etc. Therefore, if an individual’s income includes capital gains, the rebate is not applicable to the tax on such capital gain, even if the total income is less than INR 12 lakhs.

3. Annual value of 2 self-occupied properties will be treated as nil for taxation purposes.

Presently, taxpayers can claim the annual value of self-occupied properties as nil only when fulfilling certain conditions. Considering the difficulties faced by taxpayers effective from FY 2024-25, it is proposed that the benefit of two such self-occupied properties be granted without any condition.

4. Deduction under section 80CCD for contributions made to National Pension Scheme (NPS) Vatsalya

NPS Vatsalya, a scheme designed for minors, officially launched on 18 September 2024, aims to secure their financial future while promoting the importance of saving for retirement from an early stage.

The Finance Minister has announced that NPS Vatsalya subscribers will now receive the same tax benefits effective FY 2024-25 as regular NPS subscribers for their contributions under Section 80CCD(1B). Taxpayers who contribute to NPS Vatsalya account for children, dependents, or specific beneficiaries can claim an additional tax deduction of INR 50,000 under Section 80CCD(1B), similar to regular NPS contributions. Ironically, though the tax deduction of INR 50000 proposed is not available in the new regime. The government is encouraging the new tax regime adoption, passing this benefit of tax deduction under the new regime as well, which would have been reasonable

5. Exemption to withdrawals by Individuals from National Savings Scheme (NSS) from taxation

Section 80CCA, provides for a deduction to an individual, or a Hindu undivided family, for any amount deposited in the National Savings Scheme (NSS). It is also provided that no deduction would be allowed in relation to such an amount on or after the 1st day of April 1992.

Currently, amounts withdrawn from NSS, including accrued interest, are taxable if the deduction was previously claimed. A notification from the Department of Economic Affairs on 29th August 2024 announced that no interest will be paid on NSS balances after 1 October 2024.

In response to the hardship faced by individuals withdrawing due to this, the budget proposes amending Section 80CCA to exempt withdrawals made on or after 29th August 2024 from these deposits, including interest, for amounts deposited before 1 April 1992

This amendment shall be made with retrospective effect from the 29 day of August 2024.

6. Perquisites

Government in budget 2025 has increased the limits for being qualified as tax free perquisites for salaried people. Now, more employees (depending upon the increase in the limit of gross total income to be notified) are eligible for a tax-free perquisite for any expenditure incurred by the employer for travel outside India on the medical treatment of such employee or his family member, this amendment will take effect from FY 2025-26

Our Comments:

A broader strategy that will give tax relaxation to a much wider income spectrum was always a valid ask from taxpayers. The new change of increasing the 87A rebate to INR 12,00,000 offers a good deal of financial breathing room to the lower-middle income community. On top of that, restructuring the tax slabs is a welcome move for middle- and higher- salary individuals, reducing their tax burden. Moreover, we see a strategy being implemented to push more and more taxpayers into the new regime and possibly phase out the old regime completely over a few years, which is in line with the government’s promise to simplify the country’s income tax structure.  The reforms will surely cause a short-term hit on Government’s tax revenue. Still, as a long-term strategy, this will boost the purchasing power of the Aam-Admi, increasing their spending and thereby possibly boosting the Indian economy, which the latest reports indicate could be on a stagnating path.