Individual Income Tax- Budget Reforms 2025

The Government has recognised the contribution of India’s middle class in the growth of economy. The Government introduced the new tax regime couple of years ago without any deductions or incentives. Individuals could optionally apply the old regime or new regime.However the new tax regime was made the default tax regime, indicating that the government wanted to promote the new tax regime.

The Government has further amended the new tax regime to reduce the taxes, especially keeping in focus the middle class. The article relates to reform introduced in personal income tax in Budget 2025.

1. Rebate offered under section 87A – The tax rebate as per Section 87A of the Income tax Act, applicable for income upto INR 7 lakh, has been enhanced to INR 12 lakh. Considering the standard deduction available for salaried persons and rebates in the new tax regime, taxpayers with an income upto INR 12.75 Lakhs will have no tax liability as per the new regime. They will get the benefit of INR 80,000 in tax rebate (which is 100% of tax payable as per existing rates). However, the rebate is not applicable against income chargeable at a special rate of tax, like income from capital gains, etc. Therefore, if an individual’s income includes capital gains, the rebate is not applicable to the tax on such capital gain, even if the total income is less than INR 12 lakhs.

2. Annual value of 2 self-occupied properties will be treated as nil for taxation purposes – Taxpayers can claim the annual value of self-occupied properties as nil only when fulfilling certain conditions. Considering the difficulties faced by taxpayers effective from FY 2024-25, it is proposed that the benefit of two such self-occupied properties be granted without any condition.

3. Perquisites – Government in budget 2025 has increased the limits for being qualified as tax free perquisites for salaried people. Now, more employees (depending upon the increase in the limit of gross total income to be notified) are eligible for a tax-free perquisite for any expenditure incurred by the employer for travel outside India on the medical treatment of such employee or his family member, this amendment will take effect from FY 2025-26.

4. Exemption to withdrawals by Individuals from National Savings Scheme (NSS) from taxation – Section 80CCA, provides for a deduction to an individual, or a Hindu undivided family, for any amount deposited in the National Savings Scheme (NSS). It is also provided that no deduction would be allowed in relation to such an amount on or after the 1st day of April 1992.
Currently, amounts withdrawn from NSS, including accrued interest, are taxable if the deduction was previously claimed. A notification from the Department of Economic Affairs on 29th August 2024 announced that no interest will be paid on NSS balances after 1 October 2024.
In response to the hardship faced by individuals withdrawing due to this, the budget proposes amending Section 80CCA to exempt withdrawals made on or after 29th August 2024 from these deposits, including interest, for amounts deposited before 1 April 1992
This amendment shall be made with retrospective effect from the 29 day of August 2024.

5. New Income Tax Slabs under New Tax regime – New Tax Slabs under the New regime proposed to be applicable from Assessment Year (AY) 2026-27 i.e., the financial year (FY) 2025-26, along with a comparison with earlier tax regime is given below-

The increased tax slabs may make the new regime attractive to a lot more as the income difference to break even the tax liability under both regimes are now roughly INR 8 lakhs