Transforming Taxation for a Prosperous Future

The Union Budget is a cornerstone of India’s economic framework, outlining the government’s financial plans for a specific fiscal year. It provides a comprehensive summary of anticipated revenues-primarily from taxes, though not exclusively, and planned expenditures. The Budget plays a crucial role in resource allocation, policy announcements and maintaining fiscal discipline.

For the financial year 2025-26, Union Minister for Finance and Corporate Affairs Ms Nirmala Sitharaman, presented the Budget in Parliament on February 1, 2025 (Saturday), covering the period from April 1, 2025, to March 31, 2026. She has already made history as the longest-serving woman Finance Minister, and this marks her eighth consecutive Budget presentation (including the interim Budget of February 2024)-a record no other Finance Minister has achieved. Notably, in her first Budget in July 2019, she broke away from the colonial-era tradition of carrying a leather briefcase for Budget documents, opting instead for a traditional “Bahi-Khata” wrapped in red cloth. However, as seen in the last three years, the 2025-26 Budget has also been presented in a paperless format, with a digital tablet securely placed inside a red cover featuring the golden national emblem.

Framed in a highly uncertain global environment, this Budget comes at a time of significant geopolitical and economic challenges, with a new administration in the United States.

India is on the track to becoming the third-largest economy in the world. It has introduced several fiscal and taxation reforms in the Union Budget 2025-26 to accelerate growth. This budget fine-tunes taxation policies with a primary focus on reviving economic momentum, creating a tax-friendly environment, strengthening the purchasing power of the middle class and improving the ease of doing business.

An important promise made by Finance Minister Nirmala Sitharaman in her Budget of July 2024 was to undertake a comprehensive review of the Income-tax Act. The goal was to make the law more concise and lucid to reduce tax disputes and assure tax certainty. With Budget 2025-26, a significant step has been taken to fulfill that promise. The new tax regime, now set as the default system, introduces significant changes aimed at simplifying the tax structures and providing relief to taxpayers across various income brackets.

Economic Outlook:

According to the Economic Survey 2024-25 tabled in Parliament, India's economy is expected to grow at 6.3 per cent to 6.8 per cent in FY 2026, up from 6.4 per cent in FY 2025. The survey highlights the importance of calibrated fiscal consolidation and stable consumption as drivers of economic growth. Strategic and prudent policy management would be essential to navigate global headwinds while reinforcing domestic fundamentals.

Investment activity is likely to gain momentum, supported by higher public capital expenditure and improving business expectations. However, risks to inflation remain due to geopolitical uncertainties, necessitating cautious fiscal and monetary policies. To sustain long-term growth and become a developed nation by 2047, India must maintain an average growth rate of 8 per cent for the next two decades. The government aims to increase investment rates to 35 per cent of GDP, up from the current 31 per cent, to achieve this ambitious goal.

Relief for the Middle Class:

The middle class, which forms the backbone of India's consumption-driven economy, has been at the center of tax relief measures. A revision in tax slabs ensures that individuals earning up to ₹12,00,000 (or ₹12.75 lakh for salaried taxpayers with standard deductions) will not have to pay any income tax (that is, average income of ₹1 lakh per month other than special rate income such as capital gains) under the new regime. This is a significant increase from the previous exemption limit of ₹7,00,000. The rebate limit under Section 87A has gone up. The restructuring of tax slabs will substantially reduce the taxes of the middle class, leave more money in their hands and is expected to boost household consumption, savings, investment and growth. In other words, the money foregone will come back into the economy either in the form of savings, consumption or investments.

However, for people earning more than ₹12 lakh (or ₹12.75 lakh for salaried taxpayers with standard deductions) per annum under the new tax regime, following tax rates will apply:

• Income up to ₹4,00,000 is exempt from tax.
• 5 per cent tax rate applies to income from ₹4,00,001 to ₹8,00,000.
• 10 per cent tax rate applies to income from ₹8,00,001 to ₹12,00,000.
• 15 per cent tax rate applies to income from ₹12,00,001 to ₹16,00,000.
• 20 per cent tax rate applies to income from ₹16,00,001 to ₹20,00,000.
• 25 per cent tax rate applies to income from ₹20,00,001 to ₹24,00,000.
• Above ₹24,00,000, 30 per cent tax rate remains applicable.

It may be indicated here that ‘Income Tax Payable’ is determined by adding a 4 per cent Health and Education Cess to the tax amount calculated based on the above rates.

The changes introduced in the Budget make the new tax regime more attractive. A taxpayer earning ₹12 lakh will benefit by ₹80,000, while those earning ₹18 lakh and ₹25 lakh will save ₹70,000 and ₹1.10 lakh respectively. This restructuring and streamlining of Personal Income Tax slabs is expected to encourage savings and investments while strengthening consumer demand.

It is noteworthy that these tax rates follow a progressive structure, applying higher rates to higher income brackets. The new regime primarily benefits middle-income earners, providing substantial savings compared to the previous tax structure. Reportedly, these revised income tax rates/slabs and other tax relief measures will benefit 6.3 Crore people, or more than 80 per cent of taxpayers, who earn up to ₹12 lakh a year. Around 75 per cent of taxpayers have already moved to the new tax regime. Although the old tax regime remains available, the recent changes to the new tax regime, making it more striking for taxpayers, are expected to drive widespread adoption. Pertinently, those in the old tax regime will not benefit from these tax relief measures. The old tax regime remains unchanged. Taxpayers opting for it will continue to follow the existing slab rates and deductions.

The Finance Minister has announced plans to introduce a New Income Tax Bill during the budget session, focusing on simplifying tax laws, making them easy to comprehend, broadening the tax base and enhancing transparency. This is a welcome development on the tax policy front. The proposed bill is expected to be approximately 50 per cent shorter than the current law in both chapters and word count, making it more accessible for taxpayers and administrators. This initiative aims to improve tax certainty, minimize ambiguities, litigation and administrative as well as compliance costs.

Additional Tax Benefits:

Beyond changes in tax slabs, the budget introduces several measures aimed at benefiting middle-class taxpayers:

• Increased Home Loan Deductions: The budget extends tax benefits on home loan interest for first-time homebuyers. The government’s Special Window for Affordable and Mid-Income Housing (SWAMIH) initiative will complete an additional 40,000 housing units, providing relief to families caught between rent and EMI payments;
• Enhanced Standard Deduction: The standard deduction for salaried employees has been increased to ₹75,000, reducing taxable income and leaving more money in the hands of taxpayers;
• Tax-Free Withdrawals for Small Savings Accounts: Withdrawals from old National Savings Scheme accounts have been exempted from tax, ensuring that senior citizens and long-term savers receive full benefits without deductions;
• Simplification of Tax Filing: To reduce compliance burdens, the government has extended the time limit for voluntary disclosures, allowing taxpayers to amend previous years’ filings without penalties;
• Lower TDS on Essential Transactions: Reducing TDS on rental income and raising exemption limits on interest income for senior citizens ensure that middle-class earners have fewer tax deductions at source, improving their liquidity; and

• Full Digitalization of Tax Processes: By 2026, all tax-related filings and appeals will be digital, ensuring transparency and efficiency.

Voluntary Compliance:

The government has extended the time limit for taxpayers to file updated returns from two years to four years. This measure aligns with the broader goal of reducing tax disputes and encouraging honest disclosures. The 2022 initiative for voluntary tax updates saw nearly 90 lakh taxpayers step forward to update their income details, further strengthening the tax base.

Simplifying TDS and TCS:

To ease compliance for taxpayers, the budget introduces changes in Tax Deducted at Source (TDS) and Tax Collected at Source (TCS):

• The threshold for TDS on interest earned by senior citizens is doubled from ₹50,000 to ₹1,00,000.
• The threshold for TDS on rent has been increased from ₹2.4 lakh to ₹6 lakh, reducing compliance obligations for small landlords.
• The TCS threshold for remittances under the Liberalized Remittance Scheme (LRS) is increased from ₹7 lakh to ₹10 lakh, and TCS on education-related remittances from loans is removed altogether.
• The additional burden of higher TDS for non-PAN holders will now apply only in cases where PAN is not furnished.

These measures reduce administrative burdens for middle-class taxpayers and businesses alike.

Challenges and Concerns:

Despite substantial tax relief, certain challenges remain:

1. Revenue Foregone: The government will forgo approximately ₹1 lakh Crore in direct tax revenue. While this move is expected to boost consumption and investments, its long-term fiscal sustainability remains uncertain;
2. New Tax Regime vs. Old Tax Regime Debate: While the new tax regime is now the default, the old tax regime, which offers multiple deductions, is still preferred by some taxpayers. Awareness and education will be the key to successful adoption of new tax regime. It be stated here that this was an opportune time to abolish the Old Tax Regime entirely and transition fully to the new one;
3. Taxpayer Awareness: A pre-budget survey indicated that individuals were keen on Personal Tax Relief. Effective communication is essential to ensure that taxpayers fully understand the benefits available to them;
4. The Tax Reforms, though beneficial, primarily favor middle- and upper-middle-class earners. Lower-income groups that do not fall under taxable brackets do not receive direct benefits, apart from general economic growth stimulation; and

5. External Uncertainties, including the global economic slowdown and trade disruptions, inflation could impact the real benefits of increased disposable income.

To conclude, the Union Budget 2025-26 has taken a major step towards fulfilling the government’s promise of simplifying the Income Tax Act and making taxation more predictable. The middle class, a crucial driver of India's economy, stands to benefit the most from the revised tax slabs, increased exemptions, and streamlined compliance measures.

As India moves closer to becoming the third-largest economy, this budget lays the groundwork for sustained growth by ensuring that more money remains in the hands of taxpayers, thereby stimulating demand, savings, and investment. While challenges persist, the budget represents a strong push toward a tax-friendly environment and a more robust economic future for all sections of society.

This writer is a former Commerce Teacher and Life Member of IAA, IAAS, ICA, IDEA, IEA, IIPA, ISLE and SVES.