Union Budget 2025: Exploring the Last Major Income Tax Relief in History

The Union Budget 2025, scheduled to be presented on February 1, is much in anticipation by salaried people and the middle class. Inflation is soaring, and so are living costs. So, taxpayers look forward to some relief from the financial burdens. Calls for income tax relief and reforms have become louder as many hope the government will address these concerns

Economists Push for Tax Reforms

Economists and financial experts have been demanding meaningful tax reforms ahead of the budget. Experts met with Prime Minister Narendra Modi before the budget to discuss strategies to tackle economic challenges. One of the major suggestions was to reduce income tax rates so that the disposable income of people can be increased, savings boosted, and consumer demand revived.

“Income tax cuts could boost spending on necessities, particularly in the segments that have been facing softening of consumption,” an expert commented while discussing.

The Evolution of Income Tax Regimes

In the past few years, the government has brought in various changes to tax regimes that are helping taxpayers. Even though the previous Union Budget did not change the old tax regime, it has made the new regime attractive by adding more income tax slabs and increasing the standard deduction.

For example, during the 2023 Budget, it widened income tax brackets under the new regime and increased the standard deduction from ₹50,000 to ₹75,000. This deduction directly helps employees manage work-related expenses by reducing taxable income.

A Look Back at Key Tax Relief Measures

Ajinkya Gunjan Mishra, Tax Partner at S&R Associates, pointed out that the last major income tax relief came in the Union Budget for the financial year 2020-21. It introduced a new optional personal income tax regime with lower tax rates, but it requires taxpayers to forgo traditional exemptions.

“The reduced tax rates under the optional regime have particularly helped middle-income taxpayers who are not claiming deductions or exemptions,” said Mishra. He also pointed out that the tax structure of India is moderate by global standards and that the basic exemption limit of ₹3.5 lakh is lower than the corresponding exemption limit in Singapore but is higher than several European nations.

Recent Changes: A Mixed Bag

Dipesh Jain, Partner at Economic Laws Practice, acknowledged the Finance Act 2024 that expanded tax-free income slabs and reduced tax rates for certain income levels.

“The raise in the standard deduction to ₹75,000 and a long-term capital gains tax cut from 20% to 12.5% are two significant changes,” Jain said. However, he also added that there were negative effects too since removing the indexation clause from capital gains tax may neutralise all these in some scenarios.

Under the new regime, India’s top marginal tax rate of 39% is closer to the global average. Rates above 40% exist in countries like the UK and Germany, whereas in the US, they cap at 37%. But as Jain opines, if rationalizing effective tax rates is an aim, that may only enhance purchasing power and growth.

Expectations from Budget 2025

There is a growing expectation that the government will focus on ease of doing business and support infrastructure development. Many experts believe that asingle windoww clearance system should be introduced to ease bureaucratic processes for businesses.
For the middle class, reducing income tax rates is still a major demand. “Reducing tax rates will put more money in people’s hands, spurring consumer spending and economic growth,” Jain emphasized.

The underdeveloped states have also been called to need development. There has been a call by economists to have targeted fiscal support ensure balanced regional growth. Increasing infrastructure, particularly in the ports and logistics sectors, could greatly increase competitiveness and economic opportunities.