As Budget 2025 approaches, expectations are running high for significant reforms in India’s personal finance landscape. With over 7.5 crore individual taxpayers contributing a substantial portion of government revenue, the lack of progressive measures in the income tax framework has become glaring. Stakeholders are now calling for sweeping changes to make the system more equitable, incentivize compliance, and align it with contemporary economic realities.
The Case for Income Tax Reforms
India’s top tax slab of 30% on income above ₹10 lakh has remained unchanged since 2012, despite inflation reducing the real value of this threshold to almost half. Adjusted for a 6% annual inflation rate, this slab should now apply only to income above ₹21.3 lakh. Similarly, the basic exemption limit under the new tax regime, currently ₹3 lakh, is seen as insufficient. Proposals suggest raising it to ₹5 lakh, which would significantly ease the tax burden on middle-income groups.
Another critical area for reform is Section 80C of the Income Tax Act, which allows deductions of up to ₹1.5 lakh for specified investments. This cap has not been revised since 2014, even though saving and investment needs have increased significantly. Experts recommend raising this limit to ₹2.5 lakh to accommodate a broader range of investments, including Equity-Linked Savings Schemes (ELSS), Public Provident Fund (PPF), and National Pension System (NPS).
Health insurance premiums under Section 80D also demand attention, with a call to increase deduction limits to ₹50,000 for individuals and ₹70,000 for senior citizens. With only 30% of India’s population currently insured, incentivizing medical coverage has become a critical necessity amid rising healthcare costs.
Boosting Savings and Investments
Reforms in savings and investment-related tax policies are also on the agenda. Recommendations include increasing the annual exemption on interest income from ₹1.25 lakh to ₹2 lakh and reducing the Long-Term Capital Gains (LTCG) tax rate from 12.5% to 10%. Restoring the earlier 15% Short-Term Capital Gains (STCG) tax rate on equity funds could further stimulate investment activity.
Interest income exemptions on fixed deposits and savings accounts under Sections 80TTA and 80TTB are proposed to be raised. The suggested new limits are ₹25,000 for general citizens (up from ₹10,000) and ₹1 lakh for senior citizens (up from ₹50,000).
For homebuyers, increasing the tax deduction under Section 24B for interest paid on home loans from ₹2 lakh to ₹3 lakh could make homeownership more accessible.
Incentivizing Tax Compliance
To promote voluntary compliance, the government is being urged to introduce benefits for timely tax filers. Proposed incentives include reduced premiums on health insurance, lower interest rates on loans, faster approvals, and priority access to government services. Such measures could create a culture of compliance while fostering goodwill among taxpayers.
The Impact of Proposed Reforms
If implemented, these reforms could have a transformative impact on India’s personal finance ecosystem. Raising exemption limits, revising tax slabs, and increasing deductions would enhance disposable incomes, promote savings, and boost investments. Simultaneously, incentivizing compliance would strengthen the tax base, fostering long-term economic growth.
As Budget 2025 nears, the need for reforms that align tax policy with current economic realities has never been more apparent. A modernized tax framework could set the stage for financial empowerment, equitable growth, and a robust economy.
