Will Budget 2025 give any income tax relief under old tax regime? The objective of the new regime was to reduce administrative hassles for employers and employees on the collation and verification of claims made related to deductions and exemptions, and to simplify the income tax return filing process
Aarti Raote
Aarti Raote, Partner, Deloitte India
The direct tax collection, net of refunds, as of December 2024 was Rs 15,82,584 crore, reflecting a net increase of 17.45% over the previous year. Half of this collection has been from personal income tax, continuing a trend seen since FY 2022-23. This underscores the fact that individual taxpayers and, more importantly, the salaried class continue to be vital contributors to the tax kitty. With Union Budget 2025 scheduled for February 1, 2025, individual taxpayers are waiting expectantly to see what the Budget 2025 has in store for them.
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Changes in individual income tax laws announced since Budget 2020
In 2020, the finance minister unveiled a simplified tax regime, also known as new tax regime, which offered taxpayers the option to pay lower tax but forego most deductions and exemptions typically available for salaried taxpayers. The tax benefit for an individual with net taxable income of Rs 15 lakh and opting for the new tax regime, is currently approximately Rs 120,000. The tax benefit in this case comes to Rs 120,000 after the income tax slabs under the new tax regime were further relaxed/tweaked and standard deduction of Rs 75,000 was allowed to salaried individuals in Budget 2024. The objective of the new regime was to reduce administrative hassles for employers and employees on the collation and verification of claims made related to deductions and exemptions, as well as to simplify the income tax return filing process.Also read | Union Budget 2025 Income Tax Expectations Live
From 2020 till the last budget in July 2024, the finance minister successively added benefits to the new tax regime, such as: Increasing the basic tax exemption limit to Rs 300,000, reduction/relaxation in income tax slabs, increasing standard deduction to Rs 75,000, reducing surcharge rates for incomes exceeding Rs 2 crore, from 37% to 25%, increasing deduction for contribution to the New Pension System (NPS) up to 14%. Further, employers were mandated to make the new tax regime as the default regime and any employee who wanted to avail of various deductions and exemptions (as available under the old tax regime) would need to specifically opt for the old tax regime. The last five budgets saw no concessions offered under the old tax regime, clearly indicating the intention of the government to throw its weight completely behind the new tax regime.
Is old tax regime still beneficial for individual taxpayers?
The old tax regime offers a host of deductions and exemptions for salaried employees, such as House Rent Allowance (HRA), Leave Travel Allowance (LTA), medical insurance premium deduction under section 80D, deduction under section 80C, deduction of housing loan interest etc. These are still relevant for some taxpayers.
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HRA is one of the most common components in a salary compensation structure. It provides a significant reduction in the gross taxable income of employees paying rent. It forms almost 25% of the fixed pay of employees. An employee paying rent is eligible to claim exemption for HRA at the lower of 50%/40% (depending on the category of city of residence) of basic salary, actual HRA received or actual rent paid in excess of 10% of the basic salary. Hence, employees paying rent would see a sizable reduction in income tax on account of the HRA exemption. With rising rentals in all cities and the growth of nuclear families, HRA makes a significant difference in an employee's taxable salary.
LTA is another popular deduction which can be claimed by employees twice, in a block of four years, for travel within the country for self and family. The deduction permitted is the lower of the actual travel expenses or the allowance.
Also read | Will Budget 2025 announce closure date of old tax regime under Income Tax Act?
Other deductions such as under Section 80C, interest paid on education loans can also be claimed to reduce the net taxable salary. Most of these deductions need enhancements such as additional cities to be notified as metros for higher HRA exemption or LTA, Section 80C limits increased. Roughly, for an individual having a gross taxable income of Rs 15 Lakh or more, the old tax regime is likely to be beneficial if there are deductions and exemptions worth Rs 4.5 lakhs. However, by not tinkering with the old regime, the government has clearly indicated its preference for the new regime.
Will Budget 2025 increase limit of deductions, exemptions under old tax regime?
The new tax regime had been introduced to simplify compliance, both for the employer as well as the employee. Any deductions and exemptions claimed by the employee under any tax regime need to be supported by evidence, which in turn has to be verified by the employer. It is not uncommon to detect fraudulent claims made by certain taxpayers to enjoy enhanced tax breaks and reduce income tax. To eliminate this, the government is encouraging adoption of the new tax regime where an employee enjoys reduced income tax rates along with two deductions.
While in 2020, hardly any taxpayer opted for the new tax regime, that has clearly changed now. In 2024, as per details provided by the government, about 72% of the total 7.28 crore taxpayers opted for the new tax regime. This clearly reflects that taxpayers are beginning to respond positively to the government's initiative. Given past trends, it is likely that the finance minister would not increase the limits/scope of any of the deductions and exemptions in the old tax regime, and it may just be a matter of time before the government chooses to abolish the old tax regime entirely.
Aarti Raote is Partner with Deloitte Haskins and Sells CA LLP
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This story originally appeared on: India Times - Author:Faqs of Insurances
