Budget 2025: Is It Time to Say Goodbye to the Old Tax System?

The Union Budget 2025 will be presented on February 1, 2025, at 11:00 AM. There are rumors that Finance Minister Nirmala Sitharaman may reduce income tax rates to encourage spending and offer relief to middle-class and salaried people. This will be the second budget of Narendra Modi’s third term and, more than likely, an exercise that will stress stimulating the economy further. This objective fits in very well with reaching a ‘Developed India’ or ‘Viksit Bharat’ by 2047.

Most tax professionals believe that Budget 2025 may change the income tax slab in the new tax regime. because the new tax regime was introduced in Budget 2020, the government has changed only the new tax regime. and no changes have been made to the old tax system.

Changes to Section 80D

Proposal to increase the tax deduction limit under Section 80D to Rs. 50,000 (Rs. 1,00,000 for senior citizens) and include it in the new tax regime. The Section 80D deduction is available only in the old tax regime. This move is expected to encourage more people to buy health insurance.

Increase in Maximum Limit Under Section 80C

The Section 80C deduction limit is likely to increase from Rs. 1.5 lakhs to Rs. 2 lakhs since it has not been increased in the last seven years, since 2014. Increasing the Section 80C limit will encourage people to save and invest in plans such as PPF, ELSS, and NSC. This will benefit the taxpayers and, in turn, promote better financial habits.

Deduction Limit on Home Loan Interest

The deduction limit in home loan interest under Section 24(b) will be increased most likely to Rs. 3 lakhs from the current limit of Rs. 2 lakhs for more people buying homes. The changes are so designed to encourage people to buy homes, enhance the growth of the real estate market, and attract more investments in homes for the betterment of the economy.

Reduced business tax rates for new manufacturing companies

The concessional tax rate of 15% currently is applicable to new domestic manufacturing companies set up before March 31, 2024. The benefit is being proposed to be extended to the companies that start manufacturing from April 1, 2024.

This will create more opportunities for investors to set up in India. Also, with the number of Global Capability Centers (GCCs) in India growing to 1,700 and expected to increase, there’s a proposal to offer the same 15% tax rate to GCCs to help them expand and create more jobs.

Production Linked Incentives (PLI) for R&D

The elimination of the additional tax benefit over R&D expenses has undone some of the tax benefits businesses benefit from when they invest in research and development. As a way of increasing private investment in R&D, one would introduce new incentives. This would give extra tax deduction over certain costs of R&D such as salaries and materials on certain conditions like higher sales, more jobs created, or investments in R&D equipment. This would promote private-sector spending on research and development.

Reform in Tax Slabs

The government may adjust tax slabs to provide relief to individual taxpayers, helping boost spending and increase disposable income, especially for middle-income earners. It is expected that the basic exemption limit in the new tax system could be raised from Rs. 3 lakhs to Rs. 5 lakhs.

Tax Reforms and Incentives for startups

Startups need simplified tax regulations for easy compliance to foster even more innovation. Today, for example, section 80-IAC exempts tax relief on income earned for a maximum of three years in the ten initial years following establishment. Doing so for a new venture startup enables its growth to be sustained.