Budget 2025 income tax: Personal tax announcements from the Budget and their impact

New Delhi, Friday 28th February 2025 — The Union Finance Minister today unveiled Budget 2025 with a strong focus on rationalising and simplifying the personal income tax regime. Marking one of the most significant overhauls in recent years, the announcements introduced new slabs, higher exemption limits, and targeted relaxations aimed at easing the compliance burden for individuals while expanding benefits to middle-income taxpayers.

Higher Exemption Limit and Restructured Tax Slabs

The most notable announcement in the Budget was the increase in the basic exemption limit under the new tax regime from ₹3 lakh to ₹4 lakh. This measure directly benefits individuals in the lower-income group, ensuring that a larger section of taxpayers will not fall under the tax net. In addition, the highest income slab in the new regime has been revised upward from ₹15 lakh to ₹24 lakh, creating a broader distribution of taxable income bands and thereby reducing tax liability across segments.

A key structural reform has been the introduction of a new 25% tax rate slab, positioned within the restructured regime to provide a more graduated tax structure. By redistributing slabs and easing tax rates, the government has sought to balance revenue collection with the need to provide relief to salaried and self-employed individuals.

Expanded Rebate Thresholds

The rebate under Section 87A has been significantly expanded, with the eligible income threshold raised from ₹7 lakh to ₹12 lakh for resident taxpayers. This reform is expected to shield a large share of middle-class earners from direct tax obligations, particularly those outside the scope of “special rate income” such as capital gains or lottery winnings. The change effectively ensures that individuals with taxable income up to ₹12 lakh will face little to no tax liability, strengthening disposable incomes for households.

For illustration, a person earning up to ₹12 lakh annually could save approximately ₹80,000 per year (excluding cess). Meanwhile, an individual with an annual income of ₹18 lakh stands to benefit from savings of nearly ₹1.1 lakh under the new structure. These numbers highlight the tangible relief extended to taxpayers across varying income categories.

Simplifications in Housing and Savings

Several changes have been introduced to ease long-standing compliance concerns. The restrictive condition requiring taxpayers to be unable to reside in their self-occupied property due to employment or business reasons has been removed, simplifying the treatment of such property as SOP (self-occupied property).

Further, the deduction of ₹50,000 under Section 80CCD has been extended to contributions made to the NPS Vatsalya scheme for minors. At the same time, partial withdrawals of up to 25% from the NPS for specified reasons will no longer attract tax liability. This is seen as a significant relief for families planning for contingencies while investing in long-term savings instruments.

Withdrawals made after 29 August 2024 from the National Savings Scheme (NSS), where deductions had earlier been claimed, have also been exempted from taxation. This retroactive measure is aimed at boosting confidence in small savings instruments.

Encouraging Voluntary Compliance

The government has extended the time limit for filing updated returns by an additional two years. While this facility provides taxpayers more flexibility to correct or update filings, it will attract additional taxes of 60% and 70% depending on the timing of submission. The measure is designed to encourage voluntary compliance while discouraging evasion or misreporting.

Rationalisation of Investment Instruments

To remove ambiguity, the Budget announced that redemption proceeds of unexempted Unit-Linked Insurance Plans (ULIPs) will now uniformly be treated as equity-oriented funds for tax purposes. This rationalisation is expected to reduce litigation and bring clarity for both taxpayers and the revenue department.

At the same time, TCS/TDS thresholds have been rationalised. For instance, the limit for remittances under the Liberalised Remittance Scheme (LRS) has been raised from ₹7 lakh to ₹10 lakh. Similarly, the exemption for interest income earned by senior citizens has been increased from ₹50,000 to ₹1,00,000, providing greater relief to elderly taxpayers who rely on fixed-income returns.

The government has, however, retained higher TDS rates for invalid or non-PAN holders, while choosing to eliminate the provision for higher TDS/TCS rates on non-filers of returns. This step aims to reduce the compliance burden on honest taxpayers while ensuring stronger enforcement against those without valid documentation.

Broader Policy Direction

In a forward-looking announcement, the Finance Minister confirmed that a new Income Tax Bill will soon be tabled in Parliament. The proposed bill is expected to simplify the existing tax framework, reduce litigation, and align the tax code with modern economic realities. The Finance Ministry stated that the legislation would be drafted to enhance taxpayer convenience while maintaining fiscal prudence.

Impact on Taxpayers

For salaried individuals, these reforms translate into higher disposable income and simplified compliance procedures. The combination of increased exemption limits, revised slabs, and rebate thresholds reduces overall tax outgo, particularly for those in the middle-income segment. For high-income earners, the restructuring of slabs ensures that tax liability is moderated without significantly eroding revenue inflows for the government.

Senior citizens stand to gain notably from the increase in the interest income exemption threshold, while families will benefit from expanded deductions under NPS schemes and NSS exemptions. Businesses too may welcome the simplification measures, as rationalisation of TDS and ULIP definitions is expected to reduce compliance-related disputes.

Reactions and Outlook

Experts in taxation and finance have largely welcomed the Budget announcements, noting that the shift towards a simplified, transparent, and relief-oriented system aligns with the government’s broader objectives of ease of compliance and taxpayer-friendly governance. While some have argued that the increase in rebate thresholds could narrow the tax base, others maintain that higher disposable incomes will stimulate consumption and, in turn, boost indirect tax revenues.

Looking ahead, the upcoming Income Tax Bill will be closely scrutinised, as stakeholders expect further reforms to bring clarity and predictability into India’s tax regime. With the Budget 2025 measures already signalling a push towards simplification, the government appears intent on building trust with taxpayers while maintaining fiscal stability.

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