With the Union Budget 2025 just around the corner, Finance Minister Nirmala Sitharaman has a big challenge to meet the growing expectations of various quarters, including taxpayers. From the government’s point of view, the challenge of handling taxpayers’ expectations has become more complex since 2020, when FM Sitharaman decided to introduce the new tax regime and also continue the old tax regime. With two systems in place, around 6.5 crore income tax filers out of the total of around 9 crore have switched to the new tax regime, and about 2.5 crore individuals are still under the old tax regime.
Similarly, with two distinct options available, taxpayers are also facing challenges in terms of dealing with the intricacies of the two tax systems.
CA (Dr.) Suresh Surana, a seasoned expert in taxation, highlights the complexities of the current system and suggests measures to simplify and rationalise individual taxation. Here’s a closer look at the key issues and recommendations for a unified tax system.
Challenges in the existing dual tax regime:
Complexity in tax computation
The current dual tax regime — offering taxpayers a choice between the old tax regime with deductions and exemptions and the new default tax regime with concessional rates but limited deductions — has introduced significant complexity, according to Surana. “Most individual taxpayers, especially salaried individuals, compute their tax liability on their own. Without professional assistance, it becomes difficult for them to assess and choose the most favorable tax regime,” he said.
Rigidity in switching between regimes
While taxpayers can choose between the two regimes each year, those earning income from business or profession face limitations. Surana points out, “A taxpayer deriving income from business or profession who opts out of the new tax regime under Section 115BAC can revert to it only once, making the process less flexible.”
Limited adoption of the new regime
Despite its goal of simplifying taxation and being the default choice since Finance Act 2023, the new tax regime has not gained widespread acceptance. “The restrictions on claiming deductions, such as health insurance premiums and standard deductions for salaried individuals, make the old tax regime more appealing for many taxpayers,” says Surana.
Also read: Old Tax Regime to see some changes finally? THESE demands top taxpayers’ wishlist!
Proposed Unified Tax Regime: A path to simplification
Tax experts are suggesting a unified tax system that merges the benefits of the old and new regimes to simplify compliance while retaining taxpayer benefits.
Rationalization of tax slabs
Surana proposes a progressive tax structure that introduces new slabs for higher incomes. “For example, a 25% tax rate for income between Rs 25 lakh and Rs 30 lakh, while retaining the 30% rate for income above ₹30 lakh, could provide relief and reduce the steepness of tax rate progression. This would ease the financial burden on higher-income individuals and incentivize compliance,” he explains.
Akshat khetan, founder of AU Corporate Advisory and Legal Services (AUCL), says that a major expectation from the Union Budget 2025 is the revision of the income tax exemption slab to Rs 25 lakh. “This bold move will have far-reaching implications. By providing tax relief to a broader segment of the middle and upper-middle class, the government will directly boost disposable incomes, catalysing consumer spending and economic activity.”
This measure, while ambitious, aligns with the evolving aspirations of a growing middle class that shoulders a significant part of the tax burden, Khetan added.
Inclusion of key deductions
While the new tax regime restricts most deductions, Surana highlights several key exemptions and deductions that should be retained or reintroduced to enhance its appeal:
Standard Deduction (Section 16(ia)): An enhanced salary deduction of Rs 75,000 compared to Rs 50,000 under the old regime would benefit salaried taxpayers.
Family Pension (Section 57(iia)): Surana suggests increasing the deduction limit from Rs 15,000 (under the old regime) to Rs 25,000.
Other Notable Deductions: He advocates for retaining deductions for contributions to the Agniveer Corpus Fund (Section 80CCH(2)) and employer contributions to NPS (Section 80CCD(2)).
Also read: Budget 2025: Home loan tax benefits to be included in New Tax Regime? Here’s what tax experts say
Additional deductions to address modern needs
To make the new tax regime more taxpayer-friendly, Surana recommends introducing the following deductions:
Section 80C (Life Insurance and Investments): Allowing deductions for investments in sovereign-backed instruments like LIC premiums, PPFs, and NSCs would promote financial security and savings, he states.
Section 80D (Medical Insurance Premiums): Highlighting the importance of healthcare post-pandemic, Surana says, “Permitting this deduction would alleviate financial concerns and make the regime more attractive.”
Section 80EEB (Electric Vehicle Loan Interest): With the push for electric mobility, he suggests including this deduction to incentivise eco-friendly investments.
Interest on Housing Loans and Setoff of Losses: “Allowing interest deductions on housing loans and setting off house property losses against other income would provide relief and encourage broader adoption of the new tax regime,” says Surana.
Taxpayers’ expectations from Budget 2025
As the Union Budget 2025 approaches, individual taxpayers look to the Finance Minister for reforms that simplify taxation, provide relief, and enhance compliance. Surana’s recommendations underscore the need for a unified tax system that addresses existing challenges while promoting financial security and economic participation.
Whether these expectations will be met remains to be seen, but the push for a balanced and rationalised tax regime is louder than ever.