Expectations for Budget 2025: Simplifying Income Tax Slabs, Reducing Tax Rates, and Clarifying Residency Rules

Personal tax plays an important role in the country’s economic growth and social equity. The changes in the Union Budget 2024-25 show that the government’s focus on making the tax system simpler, enhancing compliance and promoting financial stability to achieve the goal of Viksit Bharat.

Most of you might know that the Central Board of Direct Taxes (CBDT) has formed an internal committee to completely improve the current Income Tax Act, of 1961. The goal is to make the Act simpler, clearer, and easier to understand, which will help reduce disputes and litigation, and offer more tax certainty for taxpayers.

Here are a few areas for potential reforms in personal taxes in the upcoming Budget 2025:

1. Simplifying Tax Slabs and Reducing Tax Rates

The recent tax regime is expected to remain the default option. The Budget 2025 is expected to introduce some changes that will make this new system more appealing than the old one. One key change could be simplifying the income tax brackets and reducing the tax rates. More income tax slabs and income tax rates can make the income tax system complicated. Reducing the number of tax brackets and rates in the new tax system will make it simpler and more efficient.

2. How to Determine Residential Status for Individuals

Recently, there has been confusion about determining the residential status of Indian nationals and persons of Indian origin who visit India. This confusion arises because the term “visit” is not defined in the Income Tax Act. As a result, courts have interpreted it in different ways. To address this, it would be helpful for the government to clarify the definition of “visit” by providing clear guidelines to determine if someone’s stay in India qualifies as a visit or not.

3. Simplifying TDS Compliance for Home Buyers When the Seller is a Non-Resident (NR)

Recently, property buyers must deduct 1% of the purchase price as Tax Deducted at Source (TDS) if the property costs Rs. 50 lakhs or more. This process is simple when the seller is a resident, as there is a convenient challan-cum-statement in Form 26QB. However, the process becomes more complicated when the seller is a Non-Resident (NR).

4. Elimination of e-verification of ITR

E-filling tax returns in India allows both online uploading and subsequent e-verification (for example through OTPs). This creates challenges especially when taxpayers living outside India might not have an Indian mobile number or access to net banking services. These taxpayers are required to send the signed ITR-V to CPC, Bangalore, by courier, which adds extra cost and effort. To make it easy government should consider removing the e-verification process (both online and physical). This would allow tax returns to be uploaded and acknowledged in a single step, making tax filing easier.

5. Extended Deadline to File Revised Return

The deadline to revise an income tax return is 31st December after the end of the financial year. From January to March of the financial year individuals may earn income outside India. and the return for the country where they earned income might only be available after December, in these cases, extending the deadline to file an extension after the end of the financial year.

6. Rules for Valuing Perquisites on Electric Vehicles (EVs)

Recently, Rule 3 of the Income-tax Rules, 1962 does not specify how to calculate the value of perquisites for electric vehicles. As many employers now provide electric vehicles to senior employees, it would be wise for the Government to introduce a separate method for valuing EVs.

7. Paying Taxes or Receiving Refunds in Overseas Bank Accounts

Taxpayers who live outside india and don’t have an active bank account can face difficulties while paying taxes and receiving income tax refunds, because these services are only available through authorized banks in India. The government can consider setting up other banking options to allow taxpayers to pay taxes directly from their overseas bank accounts or receive tax refunds in them. This step could help simplify the tax process.