Union Finance Minister Nirmala Sitharaman unveiled significant tax reforms in the Union Budget 2025, including a higher tax exemption threshold and revised tax slabs under the new regime. The move aims to ease the tax burden on the middle class and simplify compliance.
Key Income Tax Changes
Under the revised tax structure, income up to ?12 lakh will now be tax-free. Including the standard deduction, the exemption extends to ?12.75 lakh. The revised income tax slabs under the new regime are:
?8–12 lakh – 10% tax
?12–16 lakh – 15% tax
?16–20 lakh – 20% tax
?20–25 lakh – 25% tax
Above ?25 lakh – 30% tax
These changes, announced amid cheers from BJP MPs, are expected to bring relief to salaried professionals and small businesses, reducing their overall tax burden.
Introduction of a New Direct Tax Code
A new income tax bill—a Direct Tax Code (DTC)—will be introduced next week to replace the Income Tax Act, 1961. Sitharaman emphasized that the new code will be simpler, easier to understand, and reduce tax litigation.
What’s Changing in the New Direct Tax Code?
The DTC is expected to address long-standing concerns about complexity and compliance. The 1961 Act, with 23 chapters and 298 sections, has become cumbersome due to numerous amendments over the years. The DTC aims to reduce this bulk by 60% and make tax laws more accessible.
Key expected reforms in the Direct Tax Code:
End of the Financial Year (FY) vs. Assessment Year (AY) Confusion. The DTC may scrap the FY-AY system, reducing confusion over tax calculations.
Standardized Tax Rates for Dividends & High Earners
Dividend income, currently taxed at varying slab rates, may be fixed at 15%.For high earners, the 35% tax rate may replace variable surcharges imposed in addition to the 30% tax slab.
Simplified Capital Gains Taxation
The differences in taxation across various asset classes may be removed, making capital gains taxation uniform.
Taxation of LIC and Insurance Proceeds
The DTC may introduce a 5% tax on income from LIC policies, which was exempt under the 1961 law.Tax Audits Beyond Chartered Accountants (CAs)
Under the new framework, Company Secretaries (CSs) and Cost & Management Accountants (CMAs) may also be allowed to conduct tax audits, which are currently restricted to CAs.
One-Tax Regime Without Exemptions & Deductions
Unlike the existing system, where taxpayers choose between old and new regimes, the DTC may remove this option, streamlining the tax system.Deductions and exemptions may be significantly reduced to align with the new tax regime, making compliance simpler.
Public & Expert Consultations
Before announcing the overhaul, the Central Board of Direct Taxes (CBDT) formed an internal review committee and set up 22 sub-committees to analyze reforms. Public input was also invited, with the government receiving over 7,000 recommendations by January 2025.
Conclusion
The Budget 2025 tax reforms mark a major shift in India’s tax landscape. The new Direct Tax Code aims to simplify compliance, reduce litigation, and standardize tax rates. With higher exemptions and rationalized slabs, the tax burden on the middle class and salaried individuals will reduce, ensuring a transparent and efficient tax system.
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