Budget 2025: Reimagining The New Income Tax Regime

This year, with the new Direct Tax Code set to be unveiled in the upcoming Union Budget, there is a unique opportunity to introduce reforms that can address critical gaps in India’s tax framework

There have been several calls recently to raise the tax-free income threshold to Rs 10 lakh, however, it is also important to enhance tax brackets rather than focusing solely on increasing tax-free income limits

Source : ABPLIVE AI

Every year, Indians await the budget anticipating the changes it will bring to their life. The widely adopted new tax structure announced in 2021 does a good job of simplifying the tax structure, however, more can and needs to be done to encourage financial discipline and equity across income groups. This year, with the new Direct Tax Code set to be unveiled in the upcoming Union Budget, there is a unique opportunity to introduce reforms that can address critical gaps in India’s tax framework. Here are three pivotal changes that can make a difference. 

Raise Threshold For The 30% Income Tax Slab

The current threshold for 30 per cent income tax, unchanged since 2020, has not kept pace with inflation while the Cost Inflation Index over the same period has gone up by 21 per cent. While the lower slabs have been hiked, this slab remain unchanged. Raising the threshold for the 30 per cent  income tax slab from Rs 15 lakh to Rs 18 lakh would prevent middle-income earners from being prematurely pushed into the highest tax bracket and foster a more balanced tax system. 

Enhance Tax Brackets

There have been several calls recently to raise the tax-free income threshold to Rs 10 lakh, however, it is also important to enhance tax brackets rather than focusing solely on increasing tax-free income limits. Merely increasing tax-free income limits risks shifting the tax burden disproportionately onto higher-income groups. Currently, just 2 per cent of taxpayers contribute 77 per cent of the total income tax collected. This disparity underscores the need for a balanced revision of tax brackets. A comprehensive adjustment across all brackets will taxpayers at all income levels.

Reintroduce Deductions

Historically, long-term investments and critical insurance have merited tax deductions. In the last five years after deductions were decoupled from income tax, the trends indicate a decline in life insurance penetration and reduced inflows into Equity-Linked Savings Schemes (ELSS) despite strong equity market performance. Additionally, the BankBazaar Aspiration Index also indicated dwindling interest in small savings schemes and the National Pension System (NPS) among salaried individuals. These patterns suggest that the absence of deductions in the new tax regime is discouraging long-term savings and financial protections, leaving households vulnerable to economic shocks.

A flat deduction of 30 per cent on gross income can be a good incentive to drive investment in long-term wealth building and essential insurance. This simplified deduction structure could cover a wide range of essential expenses, including long-term savings, insurance premiums, healthcare and education costs, and loan repayments. To ensure equity among income levels, the flat deduction could be capped at Rs 15 lakh. This would allow middle- and upper-middle-income households to benefit from the provision while preventing disproportionately large deductions for high-income individuals. This approach would encourage financial discipline without compromising on ease of compliance. Such a measure would increase the amount of disposable income in hand and encourage households to invest in financial stability. At the same time, it also aligns with the government’s objectives of fostering financial inclusion and resilience.

By aligning thresholds with inflation, ensuring balanced tax brackets, and reintroducing deductions in a simplified manner, the government can create a more equitable and inclusive tax system that incentivizes savings, protects households, and strengthens India’s financial ecosystem.

(The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)

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