The Indian government's annual budget is an eagerly anticipated event, especially for taxpayers who want to understand how new policies and reforms will affect their financial planning. In recent years, the government has introduced significant changes in the tax regime, aiming to simplify tax filings and improve compliance. One of the most notable changes has been the introduction of the new tax regime, which offers lower tax rates but without exemptions and deductions.
While the new tax regime has been well-received by some, others feel that it may not be as beneficial as the old tax system, particularly for taxpayers who are accustomed to claiming deductions. As we approach the Budget 2025, there is growing speculation about potential reforms that could make the new tax regime more attractive for the average taxpayer.
In this blog, we’ll explore five reforms that could significantly improve the new tax regime and make it a more appealing choice for taxpayers.
1. Increase in Income Tax Slabs for the New Tax Regime
One of the primary concerns about the new tax regime is that its tax slabs may not be progressive enough to benefit middle-class taxpayers. While the lower rates are enticing, the lack of exemptions and deductions means many taxpayers do not find it as advantageous. If the government increases the income tax slabs under the new regime, it would reduce the overall tax burden for many individuals, especially those in the middle-income brackets.
For instance, extending the benefit of lower taxes to those earning between ₹10 lakh and ₹20 lakh per annum could allow these individuals to retain more of their income. This reform would directly benefit salaried professionals and business owners alike, making the new tax regime more attractive.
2. Reintroduction of Key Deductions Without Returning to Old Regime
While the new tax regime eliminates several deductions and exemptions, it has left many taxpayers feeling like they are sacrificing tax-saving tools that were available in the old regime. However, a potential reform could be the reintroduction of certain key deductions, such as those for the National Pension Scheme (NPS), insurance premiums, and housing loan interest, but without making the entire tax system complex again.
By incorporating selective deductions under the new tax regime, the government could strike a balance between the simplicity of the new regime and the benefits of tax-saving instruments. This could encourage more taxpayers to opt for the new tax regime while still allowing them to save for their future through tax-saving investments.
3. Simplified Tax Filing Process
One of the key advantages of the new tax regime is its simplified structure. However, despite this, many taxpayers still find the filing process cumbersome due to the need to maintain detailed records of their finances. A reform that could enhance the attractiveness of the new tax regime would be further streamlining of the tax filing process.
The introduction of an automated system for tax filing, where taxpayers are pre-filled with relevant information, would make the process easier and more transparent. Additionally, integrating advanced technology like artificial intelligence to track income and deductions throughout the year could save taxpayers time and reduce the chances of errors in their filings.
4. Introduction of More Tax Benefits for Middle-Class Taxpayers
The new tax regime may feel like a better deal for higher-income individuals, but the middle class often feels left out, especially given the lack of exemptions. Budget 2025 could address this issue by offering more targeted benefits for the middle class, such as providing tax relief for essential expenses like education, medical bills, and home loans. This would make the new tax regime more appealing to a wider audience, as middle-class taxpayers would feel less burdened by the lack of exemptions.
For example, offering a standard deduction of ₹50,000 or ₹1 lakh under the new tax regime could reduce the tax liability for middle-income earners, making the regime more competitive compared to the old tax system.
5. Incentives for Savings and Investments
Another potential reform could be the introduction of new tax incentives that encourage savings and investments, specifically for long-term wealth creation. While the new tax regime has streamlined tax rates, there is still a significant opportunity to incentivize taxpayers to save for the future, especially in instruments such as retirement funds, health insurance, and long-term investment plans.
Introducing tax incentives for long-term savings could help individuals plan for their retirement while simultaneously reducing their tax liability. This could be done through introducing deductions on certain investment plans or offering tax-free returns on specific types of long-term investments. It would give taxpayers a reason to save, while also improving their financial security in the future.
Conclusion
Budget 2025 is poised to bring key reforms that could make the new tax regime a more attractive option for taxpayers. By considering the introduction of higher income tax slabs, selective reintroduction of deductions, simplifying the tax filing process, offering incentives for the middle class, and encouraging long-term savings, the government has the opportunity to make the new tax regime more beneficial for all taxpayers.
The goal should be to offer a tax system that is not only simple and transparent but also one that promotes savings and provides fair relief to taxpayers from various income groups. Let’s wait and watch as Budget 2025 unfolds to see how these reforms materialize and what impact they will have on the Indian tax landscape.
