The Budget 2025 introduces significant reforms in the personal income tax framework to provide relief to taxpayers while promoting compliance. Key measures include revising tax slabs under the new regime, increasing the rebate limit under Section 87A, and extending the deadline for filing updated returns. Additionally, the budget simplifies tax provisions for self-occupied properties, clarifies taxation on Unit Linked Insurance Policies (ULIPs), and extends tax benefits for contributions to the NPS Vatsalya scheme. It also proposes exemptions for withdrawals from the National Savings Scheme.
Revised Income Tax Rates and Slabs
The income tax slabs for individuals for AY 2026-27 under the New Regime have been streamlined as follows:
Sl. No. | Total Income | Tax Rate |
1 | Up to Rs. 4,00,000 | Nil |
2 | Rs. 4,00,001 – Rs. 8,00,000 | 5% |
3 | Rs. 8,00,001 – Rs. 12,00,000 | 10% |
4 | Rs. 12,00,001 – Rs. 16,00,000 | 15% |
5 | Rs. 16,00,001 – Rs. 20,00,000 | 20% |
6 | Rs. 20,00,001 – Rs. 24,00,000 | 25% |
7 | Above Rs. 24,00,000 | 30% |
The income limit for availing the tax rebate under Section 87A is proposed to increase from Rs. 7 lakh to Rs. 12 lakh under the New Regime. As a result, the tax rebate will increase from Rs. 25,000 to Rs. 60,000.
Under this proposal, individuals earning up to Rs. 12 lakh (Rs. 1 lakh per month, excluding capital gains) will not be required to pay any tax. For salaried individuals, after considering a standard deduction of Rs. 75,000, this exemption extends up to an income of Rs. 12.75 lakh.
A taxpayer with an income of Rs. 12 lakh will save Rs. 80,000 in tax, which is 100% of the tax payable under the current regime. Individuals earning Rs. 18 lakh will save Rs. 70,000 (30% of the tax payable), while those earning Rs. 25 lakh will benefit from a tax reduction of Rs. 1,10,000 (25% of tax payable under existing rates).
Extended Time Frame for Filing Updated Returns
Currently, under Section 139(8A), taxpayers can file an updated return up to 24 months after the relevant assessment year. To encourage voluntary compliance, the deadline is proposed to be extended to 48 months. The additional tax payable is structured as follows:
- Returns filed within 12 months: 25% of the aggregate tax and interest payable.
- Returns filed between 12-24 months: 50% of the aggregate tax and interest payable.
- Returns filed between 24-36 months: 60% of the aggregate tax and interest payable.
- Returns filed between 36-48 months: 70% of the aggregate tax and interest payable.
These amendments will be effective from April 1, 2025.
Simplification of Self-Occupied Property Taxation
Previously, taxpayers could claim the annual value of self-occupied properties as nil only under certain conditions. The new proposal allows individuals to claim tax benefits for two self-occupied properties without additional conditions.
Clarifications on Taxation of ULIPs
To streamline taxation on Unit Linked Insurance Policies (ULIPs), the following provisions are proposed:
- ULIPs not qualifying for exemption under Section 10(10D) will be classified as capital assets.
- Gains from non-exempt ULIPs will be taxed as capital gains under Section 45(1B).
- Non-exempt ULIPs will be considered as equity-oriented funds for tax purposes under Section 112A.
Tax Benefits for Contributions to NPS Vatsalya
The NPS Vatsalya Scheme, launched on September 18, 2024, enables parents and guardians to open National Pension Scheme (NPS) accounts for minors. Contributions to these accounts will now qualify for tax deductions under Section 80CCD, with key provisions including:
- A deduction of up to Rs. 50,000 under Section 80CCD(1B) for contributions made by a parent/guardian.
- Taxation of withdrawn amounts unless due to the minor’s death.
- Exemptions on partial withdrawals (up to 25% of contributions) for contingencies like education or medical emergencies.
Exemption on Withdrawals from the National Savings Scheme
Withdrawals from the National Savings Scheme, including interest accrued on deposits made before April 1, 1992, will now be tax-exempt for individuals making withdrawals on or after August 29, 2024. This exemption ensures that long-standing savings retain their value without additional tax burdens.
These reforms aim to enhance financial planning, improve compliance, and provide substantial relief to taxpayers.
