Income Tax Union Budget 2025 Predictions: What to Expect

As Finance Minister Nirmala Sitharaman readies the Union Budget 2025, the government’s commitment to simplifying India’s tax system is once again in the spotlight. With a strong push toward the New Tax Regime, a potential new set of personal taxation reforms could shape both taxpayer behavior and the broader economy. Here’s a look at the changes in income tax union budget that could define the year’s most anticipated fiscal event.

No Changes to Old Tax Regime Structure

• No significant revisions in tax rates or brackets under the Old Tax Regime appear likely.
• Over 72% of taxpayers have already transitioned to the New Tax Regime, which remains the government’s focus.
• A complete phase-out of the Old Regime seems unlikely at this point; only when 90% of taxpayers migrate might it be discontinued.
• Data reveals that nearly 88% of actual taxpayers earn below ₹15 lakh and contribute about 20% to total taxes. Abruptly removing the Old Regime would thus be impractical.

Source: Financial Express

Higher Tax Exemption Limit Under the New Regime

• The basic exemption limit in the New Regime could rise from the current ₹3 lakh to ₹5 lakh.
• Presently, individuals earning up to ₹7.5 lakh effectively pay no tax after standard deductions and rebates.
• Raising the threshold to ₹5 lakh aligns with simplifying the taxation framework while motivating more taxpayers to opt into the New Regime.

Read More: Budget 2025 Predictions for Real Estate

No Tax for Income Up to ₹10 Lakh

• Individuals earning up to ₹10 lakh may end up paying zero tax.
• A revised tax slab may introduce:
  • 5% tax rate for income between ₹5–10 lakh.
  • Enhanced Section 87A rebates to provide further relief.

New 25% Tax Bracket

• A new 25% tax bracket may be introduced for income between ₹15– ₹20 lakh.
• The current 30% threshold (applicable at ₹15 lakh) could be raised to ₹20 lakh.
• This change could encourage middle-class taxpayers to shift to the New Tax Regime.

Bringing Back PMAY Housing Subsidies

• The Pradhan Mantri Awas Yojana (PMAY) subsidy for Middle-Income Groups (MIG) may be revived.
• Credit-linked subsidies could be offered for homes priced up to ₹45 lakh.
• This move would enhance housing affordability for middle-income buyers.

Read More: Everything You Should Know About PMAY

Home Loan Deductions Under New Tax Reduction

• The NTR could incorporate home loan benefits similar to the Old Tax Regime (OTR).
• Expected deductions:
  • Section 24B: Up to ₹2 lakh on home loan interest.
  • Section 80C: Up to ₹2 lakh on principal repayment.
• Reinstatement of Section 80EEA for first-time homebuyers, allowing ₹50,000 deduction on home loan interest.

Source: The Hindustan Times

HRA & Housing Benefits

• Possible inclusion of House Rent Allowance (HRA) exemption under the new tax regime.
• Rationalization of GST on brokerage services and under-construction properties.

National Pension System Deductions for New Tax Regime

• A previous budget increased employer contributions to 14% under Section 80CCD(2), but this helped only a small segment of private-sector employees.
• To promote retirement savings and the New Regime, the government could permit a ₹2 lakh deduction for employees’ NPS contributions, currently exclusive to the Old Regime.
• Such a change would boost retirement planning and align with the shift to the New Regime.

EPFO 3.0: Bigger Savings for Retirement

• The proposed EPFO 3.0 initiative may allow contributions beyond the 12% cap.
• Specific NTR-linked deductions could be introduced to encourage voluntary savings.
• These reforms would help taxpayers build retirement security while reducing their tax liabilities.

Read More: EPF Withdrawal for Home Loan Downpayment

Standard Deduction May Reach ₹1 Lakh

• Under the New Regime, the standard deduction currently stands at ₹75,000, up from ₹50,000 in the Old Regime.
• A raise to ₹1 lakh would complement both the proposed ₹5 lakh basic exemption and the target of no tax liability for incomes up to ₹10 lakh.
• It fits into the broader strategy of reducing tax burdens for low- and middle-income earners.

Bigger Tax Rebates Under Section 87A

• The combination of the ₹1 lakh Standard Deduction and Section 87A’s ₹25,000 rebate could eliminate tax liability for incomes up to ₹10 lakh.
• This would free up disposable income, encouraging both consumption and investment.

Tax Relief & Investment Growth

• Increase in the Long-Term Capital Gains (LTCG) exemption limit from ₹1 lakh to ₹5 lakh.
• Reduction in Securities Transaction Tax (STT) to encourage more market participation.
• Expanded exemptions under Sections 54 and 54F for reinvestment in residential properties.

Source: Hindustan Times

Direct Tax Code (DTC) May Be Introduced

• A new Income Tax Bill (part of the Direct Tax Code initiative) might be introduced but full implementation will be gradual.
• The six-month review of the Income Tax Act, 1961, ended recently, pointing toward possible next steps in Budget 2025.
• Stakeholder consultations, drafting new rules, and updating e-filing processes may delay final adoption until future budget cycles.

No Big Changes in Capital Gains Tax

The government is unlikely to change capital gains tax rules in Budget 2025.

Why No Changes?

• The 2024 budget already made key updates, such as:
  • Higher exemption limit of ₹1.25 lakh for equity gains.
  • New holding periods to determine tax rates.
• These changes are still new, and the government wants to maintain stability to avoid affecting investors.

Reduced Tax on Crypto Transactions

Ashish Singhal, Co-founder of CoinSwitch, has proposed a significant reduction in Tax Deducted at Source (TDS) for Virtual Digital Asset (VDA) transactions in Budget 2025.

• Reduce TDS on VDA transactions from 1% to 0.01%.
• A lower TDS rate could help legitimize digital assets while fostering innovation and adoption in the crypto ecosystem.

Source: Mint

Section 80C & Other Investment Deductions

• Possible increase in Section 80C limit from Rs 1.5 lakh to Rs 2.5-5 lakh.
• Suggested introduction of separate Rs 50,000 deduction for ELSS investments, similar to NPS.
• NPS deduction (Section 80CCD(1B)) may increase from Rs 50,000 to Rs 1 lakh.
• Calls for 0% Long-Term Capital Gains (LTCG) tax on investments held for over three years.

Retirement & Pension Schemes

• Proposal to make annuity withdrawals tax-free, similar to NPS.
• Potential increase in APY (Atal Pension Yojana) minimum pension from Rs 5,000 to Rs 10,000.
• Calls for flexibility in NPS withdrawals and allowing employees to choose between EPF and NPS.

Source: The Economic Times

Conclusion

The Union Budget 2025-26 is expected to focus on tax relief for the middle class, boosting affordable housing, increasing healthcare incentives, simplifying tax compliance, and making the new tax regime more lucrative. It is likely to introduce higher deductions, restructured tax slabs, and better investment incentives, ensuring greater economic growth and taxpayer benefits.

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