Middle-Class Tax Expectations from Budget 2025: What Could Change?

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Middle-Class Tax Expectations from Budget 2025: What Could Change?
31 Jan 2025
5 min read

News Synopsis

The new tax regime was introduced in Budget 2020 with the aim of simplifying the tax structure and offering lower tax rates to individuals. However, it eliminated several key exemptions and deductions available under the old tax regime, such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA), making it less attractive to many taxpayers.

With Budget 2025 around the corner, the middle class is eagerly awaiting potential tax relief measures. Here’s a look at the top five expectations from the government under the new tax regime.

Budget 2025 middle-class expectations

1. Raising the Basic Exemption Limit

One of the most anticipated changes is an increase in the basic exemption limit under the new tax regime. Currently, individuals earning up to Rs 3,00,000 are exempt from tax. However, there is speculation that the government may raise this threshold to Rs 5,00,000.

Potential Impact:

  • An increase in the exemption limit will leave taxpayers with higher disposable income, boosting consumer spending.

  • It will help reduce the tax burden on low-income earners, making the new tax regime more attractive.

2. Inclusion of Individual Contributions to NPS

Under the existing framework, only the employer’s contribution to the National Pension Scheme (NPS) qualifies for tax benefits under the new tax regime. In contrast, the old tax regime allows deductions for both employer and employee contributions.

Expected Reform:

  • The government may consider extending tax benefits to individual contributions to NPS under the new regime.

  • This move will encourage long-term retirement savings and provide parity between the old and new tax regimes.

3. Enhancing the Section 87A Rebate Limit

As per the current tax laws, individuals with an annual income of up to Rs 7,00,000 qualify for a 100% rebate under Section 87A. Taxpayers are hopeful that the government will increase this threshold to Rs 8,00,000 in Budget 2025.

Why This Matters:

  • A higher rebate limit will benefit middle-class taxpayers, effectively reducing their tax outgo.

  • It will enhance disposable income, which can drive investments and consumption.

4. Revising the Tax Slabs

Currently, under the new tax regime, the highest tax slab of 30% applies to individuals earning above Rs 15,00,000. Many experts anticipate a revision in these slabs to provide relief to taxpayers in higher income brackets.

Expected Changes:

  • The 30% tax slab may be shifted to income above Rs 20,00,000 instead of the existing Rs 15,00,000 limit.

  • A revision in tax slabs will make the new regime more attractive compared to the old system, which offers deductions and exemptions.

5. Increase in Standard Deduction Limit

In Budget 2023, the government raised the standard deduction limit from Rs 50,000 to Rs 75,000. Experts believe there is room for further enhancement, with expectations of an increase to Rs 1,00,000 in Budget 2025.

Benefits of This Change:

  • A higher standard deduction will provide additional tax relief to salaried individuals and pensioners.

  • It will help bridge the gap between the benefits available in the old and new tax regimes.

Conclusion

As Budget 2025 approaches, the middle class eagerly anticipates reforms that could make the new tax regime more appealing. The demand for raising the basic exemption limit, expanding NPS benefits, revising tax slabs, and increasing the standard deduction reflects the broader need for a taxpayer-friendly system. These changes could not only provide financial relief but also boost consumption, savings, and overall economic growth.

While the government aims to simplify taxation and encourage more people to transition to the new regime, balancing revenue collection with taxpayer benefits remains a challenge. A well-structured tax regime that offers relief without compromising fiscal stability would be a win-win for both taxpayers and the economy.

Whether the government meets these expectations will be revealed in the upcoming budget, but one thing is certain—the middle class is hoping for a more inclusive and beneficial tax framework in 2025.

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