Budget 2025: Is Government Going To Cut Personal Income Tax?

In a move that could bring much-needed relief to taxpayers of India, the government is reportedly considering reducing the personal income tax for individuals earning up to Rs 15 lakh annually. The government may announce this tax reduction in the upcoming Union Budget 2025-26, which will be presented on February 1.

The update, originally reported by Reuters, cites two anonymous government sources who say that the size of the cut is still under discussion, however, the final decision can only be known closer to the budget day. If implemented, such a tax reduction will allow middle-class taxpayers, a segment that has been vocal about its financial burden, to pocket more disposable income.

What could change?

Currently, we have two tax regimes in India that run parallelly. These are the Old Tax Regime and the New Tax Regime - taxpayers choose between the two based on their financial preferences.

Both regimes are different based on varying tax slabs and tax benefits they provide. Here’s what they offer;

The old tax regime is a legacy system that provides various deductions and exemptions for investments in financial instruments like insurance, provident funds, home loans, etc. Under this regime, income up to Rs 2.5 lakh is exempted from tax liabilities while those earning above Rs 10 lakh are taxed at 30 per cent.

The tax slab under the old regime is as follows;

Up to Rs 2.5 lakh : NIL

Rs 2.5 to Rs 5 lakh: 5%

Rs 5 lakh to Rs 10 lakh: 20%

Rs 10 lakh and above: 30%

The new tax regime, introduced in 2020 offers a lower tax rate but eliminates most deductions and exemptions that taxpayers get under the old tax regime. For instance, under the new regime, incomes between Rs 3 lakh and Rs 7 lakh are taxed at 5 per cent while incomes above Rs 15 lakh are taxed at a 30 per cent slab.

In the Union Budget 2024-25 the tax structure in the new tax regime was revised as follows;

Rs 0-3 lakh - Nil

Rs 3-7 lakh – 5 per cent

Rs 7-10 lakh – 10 per cent

Rs 10-12 lakh – 15 per cent

Rs 12-15 lakh – 20 per cent

Rs 15 lakh and above – 30 per cent

During the announcement of these revised slab rates, Finance Minister Nirmala Sithraman stated that salaried employees will save up to Rs 17,500 in income tax in the new tax regime after these changes.

However, despite the lower tax bracket, the absence of key exemptions and deductions has left many taxpayers hesitant to shift or adopt the new regime.

The government has been trying to push people to embrace the new tax structure by making it more attractive for taxpayers. If the Union government were to revise the tax structure again, it would be mostly probably under the new regime.

The backdrop of this potential policy shift includes mounting criticism from the middle class over high taxes and inflationary pressures that have eroded household income and the purchasing power of the taxpayers.

By putting more money into the hands of middle-income households, the government could address two critical challenges: reviving consumption-led growth and alleviating political dissatisfaction among urban voters.

As the countdown to Budget 2025 begins, all eyes will be on Finance Minister Nirmala Sitharaman to see if the government takes this bold step to offer relief to the middle class and reset the trajectory for India’s economic recovery. Will this be the year the middle class finally gets a break, or will fiscal constraints keep the status quo intact? February 1 holds the answers.