Income Tax Slab Proposals: EY has issued a press release calling on the government to implement specific measures in Budget 2025 aimed at enhancing consumption and boosting India’s economic growth. Among these proposals is an increase of the basic exemption limit to Rs 5 lakh in the new tax regime, as well as addressing discrepancies within the current capital gains tax framework.
EY, a leading consultancy firm, advocates for an elevation of the basic exemption limit from Rs 3 lakh to Rs 5 lakh under the new tax regime, along with reduction in income tax rates for lower-income taxpayers, and ongoing rationalisation of TDS in the Union Budget for 2025.
In their press release, EY states, “The forthcoming budget should prioritize personal tax relief by increasing the basic exemption limit in the new regime to Rs 5 lakhs and lowering tax rates. It is also crucial to provide clarifications regarding the valuation of perks for electric vehicles and establish clear taxation guidelines for cryptocurrency and non-fungible tokens (NFTs), particularly concerning virtual digital asset (VDA) losses. Additionally, the restriction on offsetting losses from house property against other income should be lifted. Including tier-2 cities such as Hyderabad, Pune, Bengaluru, and Ahmedabad in the HRA exemption at 50% would create tax parity. Moreover, further streamlining for employer contributions over Rs 7.5 lakhs to designated funds is essential. Deferring TDS on PF interest exceeding Rs 2.5 lakhs until the withdrawal point will alleviate compliance burdens, while the extension of the ESOP tax deferment benefit to all employers will allow tax payments at the point of sale.
The Union Budget is set to be unveiled on February 1, 2025, and will outline the proposed income tax slabs and additional incentives for FY 2025-26.
Beyond adjustments in income tax slabs, the government should also prioritize the simplification of the tax system. Sameer Gupta, National Tax Leader at EY India, comments, “While a comprehensive overhaul of the direct tax code may take time, we might anticipate some preliminary movements toward its execution in this Budget. I also hope to see a reduction in personal income tax, primarily benefiting lower-income groups, to provide relief and stimulate demand. For small and medium enterprises (SMEs), minimizing the complications associated with tax compliance is vital. Streamlining TDS rates into fewer categories and eliminating redundant provisions will ease administrative burdens, enabling businesses to concentrate on innovation and growth.”
The government is already pursuing the simplification of Income Tax Laws. Finance Minister Nirmala Sitharaman announced a review of the Income Tax Act, 1961 in the Budget 2024 presented in July 2024. EY asserts that “a consultative approach should be embraced, inviting public feedback on draft proposals.”
In FY2023-24, over Rs 31 trillion was entangled in Income Tax litigation, representing 9.6% of India’s GDP for that year. EY emphasizes the urgent need to address and reduce the backlog of disputes.
As part of the ongoing tax law simplification efforts, TDS rate rationalization was partially achieved in the last budget. To further streamline the TDS framework, the rate structure could be condensed into 3-4 broad categories featuring lower rates and a negative list. Additional reforms should delay TDS on interest earned from employees’ PF contributions exceeding Rs 2.5 lakhs until the point of withdrawal.
EY anticipates further adjustments to the capital gains tax regulations proposed in Budget 2024. As mentioned by EY, “The government may tackle some unintended discrepancies, enhancing the rationalization of capital gains. For instance, the holding duration for capital assets, like business undertakings in slump sales, may be shortened from 36 months to 24 months, with unlisted shares in IPO Offer for Sale (OFS) being reduced from 2 years to 1 year, thereby aligning them with listed securities. Additionally, clarifications on exemptions for sovereign wealth and pension funds investing in infrastructure are necessary to maintain their eligibility for long-term capital gains.”
The government is also expected to announce other taxpayer-friendly initiatives in Budget 2025. Some possibilities include the elimination of penalties on disputable issues under Section 270A for taxpayers who provide a sincere explanation and disclose relevant facts. Furthermore, the current regime’s treatment of buybacks as dividend-cum-capital loss should not be applied to buybacks funded by share premium or the proceeds from another share/security issue, as this would result in unjust taxation of capital receipts as dividend income.