Budget 2025: Middle class awaits tax relief as inflation bites and exemptions remain unchanged

Just like any other budget, expectations of direct tax relief are high this time as well, and they are justified for two primary reasons. First, high inflation has not been accompanied by commensurate wage growth. Second, income tax slabs and exemptions have not been adjusted to account for inflation over an extended period.

While a new concessional tax regime has been introduced, its adoption remains uncertain as it removes tax incentives for investments. Moreover, it has been over a decade since any substantial tax reforms were implemented in the Union Budget.

In the 2014–15 Budget—the first after the BJP-led NDA came to power with a thumping majority—then Finance Minister Arun Jaitley raised the investment limit under Section 80C of the Income Tax Act from ₹1 lakh to ₹1.5 lakh. Additionally, the deduction limit for interest on loans for self-occupied house properties was increased from ₹1.5 lakh to ₹2 lakh. However, these thresholds have remained unchanged since then. Unsurprisingly, the middle class is now grappling with the dual burden of high prices and high taxes.

No wonder the middle class is awaiting tax relief with bated breath. According to reports, the government is considering proposals such as making annual income up to ₹10 lakh tax-free. It is also reportedly exploring a 25% tax rate for incomes between ₹15 lakh and ₹20 lakh.

However, the government may lack the fiscal capacity to implement both measures simultaneously and may choose only one, should it decide on such drastic tax moves that entail significant revenue outflows. While it is difficult to predict what the Finance Minister’s bahi-khata will include for the common man, suggestions are aplenty for the North Block to consider ahead of the Budget.

Move All to the New Tax Regime: SBI

SBI has suggested that the government could enhance disposable incomes, improve tax compliance, and boost consumption by transitioning everyone to the new tax regime. This would result in a nominal revenue loss by foregoing certain exemptions. According to SBI, if all exemptions under the old tax regime—except for health and NPS deductions—are removed, the revenue loss for the government could range between ₹16,000 crore and ₹1.19 lakh crore across different scenarios.

Case 1

The peak tax rate is reduced to 25% for incomes above ₹15 lakh, with all exemptions removed except health and NPS deductions. These deductions are retained at ₹25,000 and ₹50,000, respectively, and increased to ₹50,000 and ₹75,000 in one scenario and ₹50,000 and ₹1 lakh in another. Revenue losses are estimated to range from ₹74,000 crore to ₹1.08 lakh crore. Additionally, a flat 15% tax is imposed on bank deposit interest, delinked from the highest income tax bracket, with the exemption limit for savings bank deposits increased to ₹20,000.

Case 2

The peak tax rate is retained at 30% for incomes above ₹15 lakh, but tax rates for incomes between ₹10 lakh and ₹15 lakh are reduced to 15%. All exemptions are removed, except for health and NPS deductions, which are retained or increased as in Case 1. Revenue losses are estimated between ₹16,000 crore and ₹50,000 crore. A flat 15% tax.