Budget 2025: Will Income Tax Deductions under the Old Tax Regime be Removed?

As India prepares to present the Budget 2025 in the Lok Sabha on February 1, 2025, there are expectations for income tax relief, including bigger rebates and exemptions.

In its pre-budget predictions, the State Bank of India (SBI) advised that the government streamline the tax system by phasing out tax exemptions under old tax regime and migrating all 8.2 crore taxpayers to the new tax regime.

In Budget 2024, the government announced a comprehensive review of the Income Tax Act of 1961, with the goal of modernizing and simplifying the tax regime. The report says that the government might present a new income tax law in the upcoming budget 2025 session of Parliament.

The State Bank of India (SBI) has recommended the government to simplify the tax structure by eliminating exemptions under the previous tax regime and migrating all 8.2 crore taxpayers to the new regime. Furthermore, SBI advocated increasing deductions under the National Pension System (NPS) from Rs.50,000 to Rs.1 lakh, and doubling the medical insurance exemption under Section 80D from Rs.25,000 to Rs.50,000.

The SBI research presents three scenarios for assessing financial and taxpayer implications:

Scenario 1: Reduce the maximum tax rate to 25% for incomes over Rs.15 lakh, eliminate all exemptions (except healthcare at Rs.25,000 and NPS at Rs.50,000), and impose a 15% flat tax on bank accounts. Raising the healthcare/NPS limitations to Rs.50,000/Rs.75,000 (Scenario 1) or Rs.50,000/Rs.1 lakh (Scenario 2) may result in a revenue loss of Rs.74,000 crore to Rs.1.08 lakh crore.

Scenario 2: Maintain the 30% peak rate for income above Rs.15 lakh, but reduce the slab for Rs.10-15 lakh earners to 15%. Exemptions for healthcare and NPS remain at Rs.25,000/ Rs.50,000, but increase to Rs.50,000/ Rs.75,000 (Scenario 1) or Rs.50,000/ Rs.1 lakh (Scenario 2). This method reduces revenue loss to Rs.16,000-Rs.50,000 crore (0.14 percent of GDP) while providing middle-class savings of Rs.34,500-Rs 1.15 lakh per year.

Scenario 3: Hybrid scheme with a lower peak rate (25% for more than Rs.15 lakh) and a lower intermediate slab (15% for Rs.10-15 lakh). Exemption modifications are consistent with Cases 1 and 2, resulting in anticipated losses ranging from Rs.85,000 crore to Rs.1.19 lakh crore.

The SBI identifies Case 2 as the best balanced, emphasizing its low budgetary impact (0.14 percent of GDP) and substantial benefits for middle-income people. “By retaining the 30% top rate, revenue risks are contained, while reduced rates for Rs.10-15 lakh earners directly boost disposable incomes,” according to the report.

Apart from income tax, Persistent inflation, notably in food costs, has reduced urban disposable incomes, resulting to low private consumption. Middle-class taxpayers say that they are disproportionately burdened with direct taxes and high GST rates. Budget 2025 is expected to include initiatives to incentivize savings and address cost-of-living concerns, particularly in the face of economic headwinds.

As the government navigates these demands, the SBI’s proposals highlight an important trade-off: short-term income sacrifices for long-term benefits in compliance, consumption, and equitable growth. How policymakers reconcile these priorities will determine India’s financial trajectory for the following year.