Budget Income Tax Cuts: How Budget 2025 Marks a New Beginning for Taxpayers

The "zero" income tax for individuals earning up to Rs. 12 lakh (or Rs. 12.75 lakh for salaried taxpayers with a basic standard deduction of Rs. 75,000) was the most significant measure announced by Union Finance Minister Nirmala Sitharaman during the presentation of the Union Budget 2025-26 in the Parliament on Saturday, February 1. The government has also created new tax slabs to drastically reduce middle-class taxes and give them more money. In this article, we will explain the income tax cuts in Budget 2025.

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Table of content

Income tax slab changes budget 2025

Who does the change in tax slabs benefit?

Income Tax Cuts in Previous Budget

Potential Impact of Tax Cuts under Budget 2025

Conclusion

Most Asked Questions

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Income tax slab changes budget 2025

For the forthcoming fiscal year 2025–2026, the new income tax slabs under the new tax regime have been suggested. Taxpayers who find it difficult to reduce their income tax through investments and savings will profit from the planned modifications to the income tax slabs under the new tax regime. Under the proposed tax scheme, incomes over Rs 24 lakh, as opposed to the current Rs 15 lakh, will be subject to the highest tax rate of 30%. The new tax rates are as follows:

Rs. 0-4 lakh: Nil

Rs. 4-8 lakh: 5%

Rs. 8-12 lakh: 10%

Rs. 12-16 lakh: 15%

Rs. 16-20 lakh: 20%

Rs. 20-24 lakh: 25%

Above Rs. 24 lakh: 30%

The planned modifications to the new tax system will further increase its appeal in comparison to the previous one. To make the new tax structure more appealing to individual taxpayers, adjustments were announced in February 2023. The standard deduction was introduced, the basic exemption level was raised, the tax refund under Section 87A was increased for taxable income up to Rs 7 lakh, and other changes were made. The government made additional adjustments to the income tax slabs under the new tax regime in the July 2024 budget. The July 2024 budget's adjustments to the income tax brackets increased the highest limit in two slabs by Rs 1 lakh.

Who does the change in tax slabs benefit?

Any individual, Hindu undivided family, association of individuals (apart from a cooperative society), body of individuals, whether incorporated or not, or artificial juridical person mentioned in subclause (vii) of clause (31) of section 2 is subject to the new tax regime. Therefore, all salaried taxpayers will profit from the change in tax slabs. 

Income Tax Cuts in Previous Budget

The previous budget included the following income tax cuts: 

• Updated Slabs: The slabs were updated for the new regime.

• Enhanced Standard Deduction: The standard deduction for salaried employees was raised to Rs. 75,000 under the new regime.

• Family Pension: The deduction on the family pension was raised from Rs. 15,000 to Rs. 25,000.

• NPS Contribution: The employer's contribution to NPS was raised from 10% to 14%. As a result of these changes, a salaried employee can save up to Rs. 17,500 in taxes under the new tax regime.

Potential Impact of Tax Cuts under Budget 2025

Economic benefits of the tax cut: It was estimated that the net difference in tax collection would be around RS. 80,000 crore after assessing the change in tax needs and using averages for each income group. This transfer would be significantly more affected overall by the multiplier mechanism, which is the repeated rounds of injection into the economy due to its circular character. To keep things simple, let's examine India's about 30% gross savings rate. Consequently, 70% of income is derived from the average inclination to consume.

Shifting the focus to consumption-led growth: India has followed a path of consumption-led growth, with demand being the primary driver of growth. This is evident in both the dominant share of consumption in GDP (C/Y) and the co-movement of their development paths (barring shock outliers). This pattern has intensified over the last ten years, with a stronger link between GDP growth and rising spending. Therefore, higher disposable incomes that directly encourage discretionary expenditure are probably going to have a big growth multiplier effect.

Implications for Viksit Bharat: India's growth rate needs to shift structurally if it is to meet its goal of being a high-income nation by 2047. The implicit rise in disposable income will not only raise demand but also facilitate more capital accumulation via the savings channel. The savings rate can be gradually raised to begin the country's intended self-sufficient, industry-heavy growth trajectory. However, it should be noted that for at least the medium term, consumption will continue to be the most important factor. 

Conclusion

By announcing an increase in tax rebates in Budget 2025, Finance Minister Nirmala Sitharaman provided a significant boost to the nation's struggling middle class. Sitharaman stated at her press conference following the budget that an extra one crore people will not be required to pay taxes as a result of her statement. Nine out of ten salaried individual taxpayers will now pay no income tax, according to this. For taxpayers, this may spell the beginning of a new era, with the middle class benefitting the most.

FAQ

Q1. Is income tax change for the financial year 2024-2025?

The standard deduction of Rs. 50,000 was made available to salaried individuals choosing the new tax regime in the Budget 2023–2024. The Budget 2024-25 raised this cap to Rs. 75,000 (July, 2024). Similarly, in the Budget 2024-25 (July 2024), the deduction for pensioners' family pension was increased from Rs. 15,000 to Rs. 25,000.

Q2. How much income from a fixed deposit is tax free?

The proposed Budget 2025 would raise the current Rs 40,000 tax deduction at source (TDS) cap on interest received by non-senior general citizens from bank fixed deposits to Rs 50,000 every fiscal year. These changes will go into effect on April 1st, 2025.

Q3. What is the new tax regime in 2025?

The new tax system Individuals making up to Rs 12 lakh annually are fully free from the new tax regime proposed in the Union Budget. A new 25% tax slab for incomes between Rs 20 lakh and Rs 24 lakh has been added to the existing tax slabs.

Q4. Who benefits the most from income tax cuts?

With the income tax reduction in Budget 2025, middle-class taxpayers—particularly those making up to Rs. 20 lakhs—will gain the most.

Q5. What is standard deduction?

A fixed sum that is automatically subtracted from a taxpayer's annual income is known as the standard deduction. This lowers the overall tax liability for a fiscal year by lowering the total taxable income. 

Q6. Is the standard deduction on salary available in the new regime?

Under the new regime, taxpayers are eligible for a standard deduction of Rs. 75,000. A salaried taxpayer will not be obliged to pay any tax on income up to Rs. 12.75 lakh after deducting the normal deduction of Rs. 75,000.

Q7. How does Budget 2025 provide greater flexibility to pay tax?

Union Finance Minister Nirmala Sitharaman declared that the government wants to increase the window for filing an amended return from the current two-year restriction to four years. Accordingly, a taxpayer can now choose to file an amended return, with the additional tax payment varying based on the timing of the filing from the relevant assessment year, if they discover that they have neglected to report income of Rs. 1 lakh on which Rs. 30,000 in tax and Rs. 10,000 in interest are due.

Q8. Should you switch to the new tax regime?

The government wants to make direct taxation in India easier for middle-class and lower-income people, so people are beginning to wonder if they should switch to the new tax regime. The new tax structure is meant to be simpler, with fewer exemptions and complexities; more predictable, with a clear slab-based taxation with easy-to-calculate tax savings; and faster to comply with because it requires less paperwork and requires fewer deductions to calculate. If you want simplicity, the new regime works if you don't claim many deductions and prefer a straightforward tax system. However, the previous system can still provide greater savings potential if you depend on deductions like claim home loan interest, LIC premiums, EPF, NPS, or university expenses.

Q9. What are the tax incentives for life insurance?

The proposed amendment to Section 10's clause (10D) would exempt the proceeds from life insurance policies issued by the IFSC-based insurance intermediary office. Exemptions will be granted without imposing any restrictions on the premium amount, which is Rs. 5,00,000 for other policies and Rs. 2,50,000 for ULIPs. The premium paid for any given year during the policy's duration, however, shouldn't exceed 10% of the capital amount guaranteed.  

Q10. Will capital gains & lottery wins be eligible for a rebate?

The proposed new tax regime states that income from capital gains, lotteries, or any other source of income on which the Income Tax Act provides a specific rate will not be eligible for a refund. Only tax payable in accordance with slabs under section 115BAC will be eligible for reimbursement. 

Q11. How much tax will you pay with an income of Rs.12.10 lakh?

A person making Rs. 12.10 lakh a year would be liable for Rs. 61,500 in taxes under the proposed new tax regime, depending on the slab rate. A "marginal relief" is offered, nevertheless, which guarantees that a person who earns slightly more than Rs. 12 lakh annually will only have to pay a portion of the tax equal to the amount of income beyond Rs. 12 lakh. This results in a carry-home income of Rs. 12 lakh, with an annual tax liability of Rs. 10,000.  

Q12. How many taxpayers will benefit from the new rates and slabs?

Approximately 8.75 crore persons filed their ITRs in the most recent AY 2024–2025. All of these assessees who were paying taxes under the new tax regime will profit from the shift in rates and slabs.

Q13. Will the 80C limit increase in 2025?

The Budget 2025 Section 80C deduction cap has not been raised. The Income Tax Act's Section 80C deduction was only accessible during the previous tax system. A qualified taxpayer may claim the same Rs 1.5 lakh maximum deduction under Section 80C for the forthcoming fiscal year 2025–2026.

Q14. How much is the increase in the limit of total income for NIL tax payments?

As long as the taxpayer files an ITR to receive the refund, the limit of total income for NIL tax payments under the new tax regime has been raised to Rs. 12 lakh. Previously, the limit of income for nil tax payments was Rs. 7 lakh. By raising this limit to Rs. 12 lakh, approximately one crore assessees who previously had to pay taxes ranging from Rs. 20,000 to Rs. 80,000 will now pay nil tax.