Union Budget 2025-26: A measured step towards boosting consumption and confidence!

A Union Budget typically occupies an important space in conversations in India. Whilst wish lists are focal point in pre-budget discussions, the post budget days are filled with lengthy analysis of government’s proposals.  Union Budget 2025-26, being the first full year Budget of the government, was clearly marked with more-than-usual curiosity, as it arrived in midst of geo-political headwinds, a sliding Indian currency, alarming rise in tax disputes and murmurs about the new Income-Tax Bill.

In her speech in Parliament on Saturday, Union Finance Minister (FM) Nirmala Sitharaman reiterated the government milestone of ‘Viksit Bharat’, stating that inclusive reforms focused on Agriculture, MSME, Investment and Exports, are the means for unlocking the next phase of growth and development. The Budget proposals were structured around this overall theme, with tax and regulatory reforms being an important pillar.

The FM said that the new Income-Tax Bill will be introduced in the coming week. The new law will be simple and clear, paving the way for tax certainty and reduction in litigation – and will embody the spirit of ‘justice’, as against ‘punishment’.

With the impending overhauling of law, the FM chose to propose a few changes in the existing income-tax law. The most prominent one being the change in tax slabs and rebates under the new personal tax regime for resident individuals, which will result in no tax on income up to ₹12 lakhs, and a maximum tax saving of up to ₹1.1 lakhs.  This will provide some relief to the middle class from inflation, putting more money into their wallets – with the hope it would stimulate consumption.  Other key proposals catering to the interests of individual taxpayers are, conferring ‘tax deductible’ status to contributions made by parents/ guardians to NPS1 Vatsalya (a savings-cum-pension scheme launched in 2024 for benefit of minors); removal of restrictions attached to the claim of tax exemption for the second ‘self-occupied’ property; and relaxation of Tax Collection at Source (TCS) provisions applicable to remittances under LRS and overseas tour packages.

To enhance ease of doing business, the FM proposed rationalisation of multiple TDS/ TCS provisions and removal of higher TDS/ TCS applicable in case of non-filers of tax returns; which will be welcomed across board by all taxpayers.  Over the years, the government has promoted ‘voluntary compliance’ by taxpayers. Continuing this trend, the FM proposed an increase in the time limit for filing updated return, from 3 years to 5 years, from the end of the relevant year.  This allows taxpayers another chance to declare their incomes, beyond the regular timelines for filing of tax return (including belated return); although at the cost of incremental payouts to the government.  In a somewhat similar vein, a provision is also being introduced for furnishing of information relating to crypto assets. A bunch of proposals were also put forth for simplification of the existing tax rules, vis., rationalising the penalty time limits, increasing the validity period of registration for small trusts.

The International Financial Services Centre (IFSC) continued to feature high in the government’s priorities and earned multiple tax sops in this Budget – the existing exemption for capital gains and dividend income with reference to shares of companies engaged in aircraft leasing from the IFSC, is proposed to be extended to capital gains and dividend income arising from shares of companies engaged in ship leasing from the IFSC.  The loan related transactions between treasury centres and its group entities are also proposed to be excluded from the rigours of deemed dividend taxation, subject to conditions. Continuing with the impetus for IFSC, the FM also proposed extension of sunset dates related to commencement of operations for several tax concessions, or relocation of funds to IFSC, to 31 March 2030 (from 31 March 2025).  Similarly, the Budget proposes to extend the time limit for claim of tax holiday benefit by the Start-ups – those incorporated up to 31 March 2030 will be able to claim the tax holiday.

Few other important proposals aimed at tax simplification and rationalisation are – introduction of presumptive tax for non-residents providing services or technology in India to electronics manufacturing facilities, which envisages a tax liability of less than 10% on gross receipts of the non-resident; amendment in transfer pricing provisions to enable multi-year determination of the arm’s length price and to expand scope of safe harbour rules; and providing an exclusion from the ‘significant economic presence rule’ for non-resident taxpayers whose Indian activities are confined to purchase of goods in India for export purposes.

As is apparent, the proposals suggested in the Union Budget 2025-26 are in line with the government’s stated intent for providing tax certainty, coupled with minimum compliance burden, so as to facilitate ease of doing business and boost investor climate – the FM has reaffirmed that tax department is committed to ‘trust first, scrutinize later’.  It can be expected that the new Income-Tax Bill will also be reflective of this intent.

The fine print of the above proposals is likely to be subjected to detailed scrutiny in the coming days, and we’ll need to wait a bit to see if there are any ‘devils’ within the ‘details’.  The discussions around the government’s approach towards tax policy and reforms are likely to gain momentum on the introduction of the new Income-Tax Bill, which is expected to be the next landmark event in the Indian tax landscape, since introduction of the GST in 2017.  Still, it can be said that the FM, with the current proposals, has chosen to take a steady step towards realisation of the ‘Viksit Bharat’ aspiration, whilst maintaining a fine balance in addressing some of the imminent asks of the taxpayers, especially, the middle class.

(With inputs from Vishwendra Singh and Kanika Puliani)

Promod Batra is a Partner with Deloitte Haskins and Sells LLP. Views are personal.