The old tax regime remains unchanged.
'Taxpayers opting for it will continue to follow the existing slab rates and deductions.'
Finance Minister Nirmala Sitharaman, who presented her eighth consecutive Union Budget on February 1, streamlined personal income-tax slabs and adjusted tax deducted at source (TDS) limits.
Budget 2025: Tax-free income limit under new regime rises to Rs 12 lakh
Key changes to income tax slabs
The FM has proposed to revise tax slabs and rates under the new tax regime. A new tax slab with a 25 per cent tax rate has come in.
The rebate limit under Section 87A has also gone up. These changes will translate into nil tax liability for income up to Rs 12 lakh.
"For salaried individuals, the nil limit will rise to Rs 12.75 lakh, thanks to the standard deduction of Rs 75,000. Section 87A has been amended to offer a rebate of Rs 60,000, up from Rs 25,000," says Suresh Surana, a Mumbai-based chartered accountant.
A tax rebate allows for a reduction in tax payable, provided certain conditions are met.
Parveen Kumar, partner, direct tax, Dewan P N Chopra & Co, says the rebate applies only to tax on salary income, not capital gains.
The old tax regime remains unchanged. "Taxpayers opting for it will continue to follow the existing slab rates and deductions," says Kumar.
"This shows the government's intent to make the new tax regime more beneficial and promote more individuals to opt for it," says Akhil Chandna, partner, Grant Thornton Bharat.
Who benefits
Budget 2025 benefits individuals across income levels, especially those earning up to Rs 12 lakh, with the tax-free threshold rising from Rs 7 lakh to Rs 12 lakh.
"Individuals without exemptions or deductions will benefit the most as the slabs have been rationalised," says Chandna.
Tax on capital gains applies
Rebate under Section 87A does not apply to incomes taxed at special rates, such as capital gains or lottery winnings.
"For example, if an individual earns Rs 14 lakh, including Rs 3 lakh from long-term capital gains, the rebate will not apply to the capital gains, which will be taxed at 12.5 per cent despite the rebate being available for income up to Rs 12 lakh," says Vishwas Panjiar, partner, Nangia Andersen LLP.
This distinction. Kumar adds, is crucial for individuals with investment income or asset sales that may trigger capital gains tax, even if their income is below the Rs 12.75 lakh threshold.
New tax regime turns more attractive
According to experts, the changes introduced in the Budget make the new tax regime more attractive.
"The government has actively promoted the new regime by offering higher tax-free limits, lower tax rates, and simplified compliance," says Megha Jain, tax expert, ClearTax.
Kumar points out that the new regime's simplified structure eliminates the need to track deductions like house rent allowance (HRA), Section 80C, and Section 80D.
"Individuals who benefit significantly from deductions, such as those with large housing loans or medical expenses, may still prefer the old tax regime," he adds.
Higher income in the hands of taxpayers may boost spending on goods and house purchases, and investments.
"Since taxpayers are no longer forced to invest in tax-saving instruments, like the Public Provident Fund, Equity-Linked Savings Scheme, or National Pension System, spending on travel, entertainment, and other goods is likely to increase," says Jain.
The removal of tax-saving deductions may, however, reduce long-term savings.
"People may spend more but save less, leading to financial insecurity in the future," says Jain.
Those with stock market or real estate investments may face tax liabilities even if their salary is tax-free, Jain adds.
Himali Patel is a Mumbai-based independent financial journalist
Feature Presentation: Ashish Narsale/Rediff.com
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