Budget 2025: Time to Reform Personal Taxation and Reward Taxpayers

As Budget 2025 approaches, India’s personal finance ecosystem is poised for a revolution. Despite having over 7.5 crore individual taxpayers and income tax accounting for a significant amount of government revenue, this population is underserved, and improvements to encourage compliance are long overdue for practically all taxpayer categories.

Since 2012, the highest 30% tax band on income beyond Rs.10 lakh has stayed steady. With inflation, it should now be Rs.21.3 lakh. This underscores the disconnect between tax policy and economic reality. Also, almost 60% of taxpayers use section 80C (of the Income Tax Act) for savings, but the current limit of Rs.1.5 lakh, which has remained fixed since 2014, does not meet modern financial needs.

Equity mutual funds had inflows totalling Rs.1.84 lakh crore in FY 2024. Rural populations often lack access to basic healthcare due to the concentration of doctors in metropolitan areas. As of 2024, approximately 30% of India’s population has some sort of health insurance, demonstrating the importance of encouraging the adoption of medical coverage for individuals facing escalating medical costs.

These figures highlight how urgently we require revolutionary income tax and personal finance policy changes to put individuals on the path to wealth and progress.

Here are some key personal finance expectations for Budget 2025.

Reforms of Income Tax

• The new regime’s basic exemption level should be raised from Rs.3 lakh to Rs.5 lakh.
• The maximum income tax slab of 30% on income more than Rs.10 lakh (as per the old regime) should be changed. Adjusting for 6% inflation, this should rise to Rs.21.3 lakh by 2025.
• Under the new tax regime, the Rs.15 lakh slab will be increased to Rs.20.1 lakh.
• The section 80C deduction limit of Rs.1.5 lakh should be expanded to Rs.2.5 lakh to accommodate a broader variety of investments, such as ELSS, PPF, and NPS in old tax regime.
• The health insurance premium-linked deduction limitations under Section 80 D should be enhanced to Rs.50,000 for ordinary individuals and Rs.70,000 for senior citizens. This should be allowed under the new tax regime.

The proposed reforms, which include raising the limit of exemption to Rs.5 lakh, introducing higher slabs, and increasing the standard deduction, would improve disposable income and savings. Raising the section 80C limit to Rs.2.5 lakh will promote investments in ELSS, PPF, and NPS. These improvements have the potential to boost economic growth, increase tax compliance, and provide financial stability.

Incentives for Savings and Investments

• The yearly exemption rate should be raised from Rs.1.25 to Rs.2 lakh.
• The LTCG (long-term capital gains) tax rate should be reduced to 10% from its existing 12.5%.
• The previous short-term capital gains (STCG) tax on equity funds of 15% should be reinstated.
• The interest exemption on bank fixed deposits for general and senior citizens should be enhanced from Rs.10,000 to Rs.25,000 (under section 80 TTA) and Rs.50,000 to Rs.1 lakh (under section 80 TTB), respectively.
• The deduction of  tax for interest paid on home loans under section 24B should be reconsidered and increased from Rs.2 to Rs.3 lakh in favour of homebuyers.

Reducing LTCG and STCG rates would make investments more appealing, encouraging long-term stock purchases. Increased section 80TTA and 80TTB limitations, as well as home loan interest deductions, would increase savings and make homeownership more accessible.

Encourage Tax Compliance

The government can use a variety of incentives to encourage compliance, such as paying rewards to taxpayers who file their returns on time. Financial incentives include lower health insurance premiums and interest rates, as well as faster loan approvals. Taxpayers may also have preferential access to government healthcare, lower utility bills, and other benefits.

All eyes on 1st February Budget

Budget 2025 should prioritize empowering people by increasing exemptions, modifying tax slabs, increasing deductions, and cutting LTCG and STCG rates. This will increase savings, boost tax compliance, and promote overall economic growth. Hope, this budget will bring much need relief that are awaiting by the people of India.