Budget 2025: Key Reforms that will make New Tax Regime better

Finance Minister Nirmala Sitharaman is expected to present the Union Budget 2025 on February 1, 2025. Taxpayers are eagerly hoping for future improvements that may alleviate their financial burden, particularly as inflation has boosted the cost of living.

Given the second quarter’s low GDP, the government is expected to focus on raising consumption, which may result in tax relief measures aimed at improving personal finances for paid taxpayers.

The new tax regime is set to take centre stage in the budget, with changes intended to make it a more appealing alternative to the conventional tax structure.

The upcoming budget could feature a number of changes to the new tax regime aimed at simplifying compliance and lowering the tax burden for individuals.

According to tax experts, one key proposal is to increase the income exemption level from Rs.7 lakh to Rs.8 lakh or even more.

There is also discussion of increasing the standard deduction for salaried individuals from Rs.75,000 to Rs.1 lakh.

The government should simplify income tax slab or lower tax rates for middle-income class individuals. This would increase disposable income and stimulate economic activity. Introducing deductions for National Pension Scheme (NPS) contributions or housing loan interest could further encourage taxpayers.

Additionally, family-oriented tax relief, such as deductions for educational expenses or medical insurance premiums, may be implemented.

The government is also considering recalibrating concessional tax rates for income groups ranging from Rs.7 lakh to Rs.15 lakh. This might bring significant relief to middle-income taxpayers and inspire more people to choose the new tax regime.

Although the emphasis is on modernising the new tax regime, the previous tax structure is unlikely to be forgotten. Many taxpayers continue to prefer the traditional system because of its fixed deductions and exemptions. Experts propose that the government might boost the Section 80C deduction limit from Rs.1.5 lakh to Rs.2 lakh, as well as the limits on home loan interest deductions under Section 24(b) from Rs.2 lakh to Rs.3 lakh.

Further changes could include increased medical insurance premium deductions under Section 80D and more relief for those with disabled dependents under Section 80DD. These changes would ensure that the old tax regime remains sustainable for those who benefit from its provisions.

Some experts predict the new tax regime would not include many new deductions because it intends to streamline taxation. Others are excited about provisions that may benefit specific sectors.