The salaried class has been waiting for a big tax relief from the finance minister for a long time and it is expected that Budget 2025 may deliver it. Most experts whom we spoke with agreed the last time when a ‘big’ tax relief was given was almost 2 years ago in 2023. In 2023 the finance minister introduced a big increase in 87A rebate in the new tax regime which offered taxpayers a choice of no income tax for up to Rs 7 lakh income provided the taxpayer forgoes claim on most tax deductions. Since then, experts say many other tax relief schemes were introduced but none were as big as this relief.
What are the focus areas which can deliver a big tax relief to the common man in Budget 2025?
We have asked various experts their suggestions on how the FM can give a big tax relief to the common taxpayers and companies in order to lift consumption and ultimately uplift the economy. Here’s a summary of they said:
Major tweak in income tax slab rates needed and link it with inflation
Rahul Charkha, Partner at Economic Laws Practice, says, over the past decade the inflation rate fluctuated between 6 and 7% per annum with 2013 being an anomaly where inflation rate touched 10.92%. However, the income tax slab rates under have not kept pace with rising living costs especially in the higher tax slab.
Charkha says: “The highest income tax bracket, set at Rs 15 lakh, has not been adjusted to reflect the growing cost of living. As a result, even though salaries may rise in response to inflation, individuals may be pushed into higher tax brackets, leading to higher tax liabilities without an actual increase in their purchasing power. Therefore, one key suggestion is adjusting income tax slabs in India to account for inflation.”
Charkha cites the example of the USA and Germany where tax slabs are annually adjusted to match the prevailing inflation rate. “By linking income tax slabs to inflation, India could protect the purchasing power of its citizens, especially for the middle class, which constitutes around 70% of earners. This would make the tax system more equitable, as taxpayers would not be penalized with higher taxes simply due to inflation,” he says.
Increase the section 87A tax rebate limit
Faranaaz G. Karbhari, Counsel at HSA Advocates suggests the government should increase the income tax rebate under section 87A. Just to recap, section 87A rebate is given to those taxpayers who have an income up to Rs 5 lakh under the old tax regime or up to Rs 7 lakh in the new tax regime. Under section 87A eligible taxpayers can claim up to Rs 12,500 or Rs 25,000 as tax rebate. Once an eligible taxpayer applies section 87A tax rebate his/her total tax liability becomes nil.“The purchasing power of consumers can be readily increased/strengthened by increasing the disposable income available to them. Taxes imposed on consumers directly affect the amount of disposable income available with them, which then directly influences their spending capabilities and habits in the economy. Raising the tax rebate limit of personal income tax is one of the many ways to increase the level of disposable income available to consumers,” she says.
Come out with policies for accessible home loans
Nangia suggests the FM should come out with a new policy which makes home loans more accessible for individual taxpayers.
“Individual taxpayers expect significant relief from the government in terms of providing incentives for first-time homebuyers, along with making home loans more accessible to them,” Rakesh Nangia, Founder and Managing Partner, Nangia & Co LLP says.
Punit Shah, Partner, Dhruva Advisors agrees with Nangia and adds the interest deduction limit should be substantially increased for home loan interest, providing additional benefits to first time homebuyers and aligning tax exemption limits and deduction caps with inflation. The interest portion of the home loan EMI for the year can be claimed as a deduction from your total income up to a maximum of Rs 2 lakh under Section 24.
How benefits given to corporates can trickle down to the common taxpayers
Nangia shares some ways to give benefits to corporations which can help in job creation and reduce the cost of doing business, essentially increasing investments.
Extending presumptive scheme to MSME and new age businesses: Government should extend presumptive taxation to MSMEs as well as new age businesses like data centres, data hosting, cloud computing etc. By reducing tax-related burdens, such businesses can focus on expanding operations, creating jobs, and offering products at competitive prices ultimately leading to an upsurge in consumer spending.
Extension of concessional tax regime to LLPs: Presently the concessional tax regime is applicable only to domestic companies. The benefit of the reduced tax rate should be extended to LLPs as well. LLPs are subjected to a flat rate of 30 percent at present. In case the benefit of concessional tax regime is extended to LLPs, they could have an option to opt for the same and avoid alternate minimum tax (AMT) liability, as the case may be. This would provide a level-playing field to different forms of entities and also enable tax savings for LLPs.
Karbhari from HSA Advocates agrees with Nangia and adds: “On the corporate side, reducing the effective corporate tax burden further, especially for MSMEs, could lead to increased business investments and job creation. This would, in turn, enhance consumer purchasing power as more employment opportunities and higher wages create a positive economic cycle.”
Was the new tax regime only big tax relief given by the FM in the recent past?
For people in the lower to middle income category the new tax regime was the only big tax relief given by the FM in the recent past. For the higher middle class and high net worth individuals Budget 2023 provided a big relief by introducing a cap on maximum rate of surcharge.
Lower to middle income category: Nangia, says, “The most notable and milestone move introduced in the recent past was in the Union Budget for FY 2020-21, which marked the launch of an entirely new tax regime. The key distinction of this regime was the substantial reduction in tax rates, provided taxpayers opted to forego the benefits of deductions typically allowed under the old system. This has led to simplification of the entire tax computation process.”
High net worth and ultra-high net worth individuals: Shah from Dhruva Advisors, says, “The last major income tax reliefs were introduced through the Union Budgets of 2020 and 2023. Budget 2023, capped the surcharge at 25% under the new regime, significantly reducing the effective tax rate for high-income earners and further enhancing the regime’s attractiveness.”
