Current Income Tax Slabs in India and Expected Changes

Current income tax slabs evaluation and anticipating future changes becomes crucial for taxpayers as the financial landscape of India is evolving. For the fiscal year 2024-25, the Indian government has outlined two distinct tax regimes: the New Tax Regime and the Old Tax Regime, each with unique benefits. With the Union Budget 2025 on the horizon, expectations are high for potential adjustments aimed at providing tax relief and boosting economic growth. This blog delves into the existing tax structure and discusses the anticipated changes, offering insights into how these developments could impact your financial planning.

Current Income Tax Slabs for FY 2024-25 (AY 2025-26)

India’s income tax structure is designed to accommodate different taxpayer profiles, offering two regimes: the New Tax Regime and the Old Tax Regime. Here’s a closer look at each:

New Tax Regime

The New Tax Regime was introduced to simplify the tax calculation process by offering lower tax rates but fewer exemptions and deductions. Here are the slabs under the New Tax Regime:

Key Points:

• Lower Tax Rates: The tax rates are lower compared to the Old Regime.
• Fewer Exemptions: This regime does not allow many deductions and exemptions, making it simpler but potentially less beneficial for those with high investments in tax-saving instruments.
• Simplified: Ideal for taxpayers with minimal investments and exemptions, looking for straightforward tax calculation.

Old Tax Regime

The Old Tax Regime, also known as the traditional tax structure, offers various deductions and exemptions under different sections of the Income Tax Act. Here’s a breakdown of the slabs under the Old Tax Regime:

 Key Points:

• Higher Rates, More Benefits: Although tax rates are higher, this regime allows multiple deductions and exemptions.
• Deductions and Exemptions:
  • Section 80C: Deductions up to ₹1.5 lakh for investments in PPF, EPF, life insurance, ELSS, etc.
  • Section 80D: Deductions for health insurance premiums.
  • Home Loan Interest: Deduction up to ₹2 lakh on home loan interest.
  • Standard Deduction: ₹50,000 from salary income.
• Ideal for Tax Savers: Best suited for individuals who make significant tax-saving investments and prefer maximum deductions.

Expected Changes in the Income Tax Slabs for Budget 2025

As we approach Budget 2025, numerous speculations centre on potential changes in income tax slabs aimed at simplifying the tax structures and providing relief to taxpayers. Let’s look at the anticipated changes:

Increase in Basic Exemption Limit

One of the significant expectations is the increase in the basic exemption limit from ₹3 lakh to ₹10 lakh. This change is anticipated to provide substantial relief, particularly to middle-class taxpayers. By raising the exemption limit, individuals earning up to ₹10 lakh could avoid paying any income tax, enhancing their disposable income.

Hike in Standard Deduction

The current standard deduction under the New Tax Regime stands at ₹75,000, while it’s ₹50,000 in the Old Tax Regime. There is a strong demand to increase the standard deduction limit to ₹1 lakh under both regimes. This hike would help reduce the taxable income for a broader base of taxpayers, offering more breathing room amidst rising living costs.

Introduction of Mid-Tier Slabs

Market experts have hinted at the introduction of new tax slabs for incomes ranging between ₹12 lakh to ₹50 lakh, potentially with lower tax rates than the current 30%. These mid-tier slabs could look something like this:

• ₹10 lakh to ₹12 lakh: 20%
• ₹12 lakh to ₹15 lakh: 20%
• ₹15 lakh to ₹20 lakh: 25%
• ₹20 lakh to ₹50 lakh: 30%

Such structured slabs would help reduce the tax burden on higher-middle-income earners.

Enhanced Deductions

Taxpayers are hopeful for increased deductions under sections 80C and 80D7. The 80C limit might rise from ₹1.5 lakh to ₹2 lakh, covering investments in life insurance, PPF, and ELSS8. For health insurance premiums under section 80D, an increase in the deduction limit to ₹1 lakh is anticipated. These enhancements aim to facilitate greater savings and improved financial security for taxpayers.

Housing Loan Interest Deduction

The expectation is to raise the housing loan interest deduction limit from ₹2 lakh to ₹3 lakh. This increase will be particularly beneficial for homebuyers, reducing their taxable income and encouraging more people to invest in real estate. Given the rising property prices, this relief could significantly ease the financial strain on middle-income homebuyers.

Simplification of Capital Gains Tax

The capital gains tax regime is also expected to undergo adjustments to simplify its structure. Potential changes include rationalizing the rates and holding periods, aligning them with international standards. This could involve:

• Short-Term Capital Gains (STCG): Simplifying the rate, potentially reducing it from 20% to a more uniform rate.
• Long-Term Capital Gains (LTCG): Further reducing the rate to enhance the attractiveness of long-term investments.

Implications for Taxpayers

Understanding the impact of current and anticipated changes in income tax slabs is crucial for taxpayers. These changes can significantly affect financial planning, spending, and overall economic health.

Relief for Middle-Class Taxpayers

Financial Relief: The anticipated increase in the basic exemption limit to ₹10 lakh is expected to bring substantial relief to middle-class taxpayers. By exempting a larger portion of their income:

• Tax Savings: Middle-income individuals will save more, reducing their overall tax liability.
• Increased Disposable Income: More take-home pay means families have more to spend on daily needs and savings.

Examples:

1. Basic Exemption Increase: Someone earning ₹8 lakh, who currently pays tax on ₹5 lakh under the new regime, would pay no tax if the exemption limit rises to ₹10 lakh.
2. Standard Deduction Hike: Enhancing the standard deduction to ₹1 lakh helps salaried employees reduce their taxable income further.

Boost to Consumer Spending and Investments

Increased Spending Power: When taxpayers have more money saved from tax payments, they tend to spend more:

• Consumer Goods: Increased expenditure on consumer goods like electronics, vehicles, and luxury items.
• Services: Enhanced spending in healthcare, education, travel, and leisure.

Higher Investments: Taxpayers with more disposable income may opt to invest in various financial instruments:

• Mutual Funds and Stocks: Additional savings might flow into the equity market, boosting capital markets.
• Real Estate: Higher deductions on housing loan interest encourage property investments, benefiting the real estate sector.
• Savings Schemes: Investments in tax-saving schemes under sections 80C and 80D might see a rise, increasing overall investments in the economy.

 Impact on Economic Growth

Economic Stimulation: The combined effect of increased consumer spending and higher investments can lead to significant economic growth:

• Demand Surge: Higher spending boosts demand for goods and services, leading to increased production.
• Job Creation: Enhanced economic activity can create more jobs, reducing unemployment rates.
• Investment in Infrastructure: More investments mean more significant infrastructure development, supporting long-term economic sustainability.

Broader Economic Benefits:

• Revenue Generation: Simplified and fair tax policy can increase compliance and expand the taxpayer base, raising government revenue.
• Balanced Growth: With more people investing and consuming, every sector of the economy benefits, leading to balanced and inclusive growth.

Key Points

• Current Structure: Both the New and Old Tax Regimes for FY 2024-25 (AY 2025-26) were detailed, highlighting different tax rates and available deductions.
• New Tax Regime: Explained as having lower tax rates but fewer exemptions and deductions.
• Old Tax Regime: Noted for higher tax rates with multiple deductions and exemptions.

Anticipated Changes:

• Basic Exemption Limit Increase: Discussed the potential rise to ₹10 lakh.
• Standard Deduction Hike: Speculated increase to ₹1 lakh.
• Mid-Tier Slabs Introduction: Possible new slabs for incomes ₹12 lakh to ₹50 lakh.
• Enhanced Deductions: Expected increases under sections 80C and 80D.
• Housing Loan Interest Deduction: Potential increase from ₹2 lakh to ₹3 lakh.
• Capital Gains Tax Simplification: Mentioned adjustments to simplify the tax structure.

Implications for Taxpayers:

• Middle-Class Relief: How increased exemptions and deductions reduce the tax burden.
• Consumer Spending and Investments: Highlighted how increased disposable income could boost the economy.
• Economic Growth: Broader economic benefits from changes in tax policy.

 Conclusion

Navigating India’s fiscal landscape requires staying informed about the current tax structure and anticipated changes. As discussed, both the New and Old Tax Regimes offer distinct benefits, while the potential adjustments in Budget 2025 promise significant relief for taxpayers. These changes are poised to increase disposable income, spur consumer spending, and boost economic growth. By understanding these dynamics, taxpayers can make more informed financial decisions, ensuring that they maximize their savings and investments in an evolving economic environment.