Union Budget 2025-26: How Nirmala Sitharaman Can Win Over More Taxpayers to the New Tax Regime

However, from AY 2024-25 (applicable to the financial year 2023-24), finance minister, Ms Nirmala Sitharaman vide the announcement in the Union Budget 2023, the New Tax Regime was made the default option. If you, the assessee wants to shift to the old tax regime (from the New Tax Regime) filing Form 10IEA is necessary.

An individual with non-business income can switch between the new and old tax regimes every year.  However, those individuals with business or professional income are not eligible to choose between the two regimes every year. Once they opt out of the new tax regime, they have only one chance of switching to the new regime. After switching back to the new regime, it is not possible to choose the old regime anytime in future.

Against this background, given that the New Tax Regime is a default option and the government wants to attract as many individual assessees as possible to this regime, making it attractive enough is the need of the hour.

While tax rates have been tweaked in the last full Union Budget 2024-25 (presented in July 2024) and the below-mentioned changes were made, it doesn't seem encouraging enough to win over more taxpayers to opt for the New Tax Regime.

Key modifications in the New Tax Regime include...

1. Higher Tax Rebate Limit raised to Rs 7 lakh, compared to Rs 5 lakh under the old tax regime.

2. Increased Standard Deduction to Rs 75,000 from Rs 50,000 in FY 2024-25.

3. Raised deduction on the family pension of pensioners to Rs 25,000 from Rs 15,000 for FY 2024-25.

4. Hiked deduction on employer's NPS contribution for private sector employees to 14% from 10%

5. Significantly raised Leave Encashment Exemption on retirement for non-government employees to Rs 25 lakh from 3 lakh.

6. Reduced surcharge for high earners (income exceeding Rs 5 crore) to 25% (from 37%), lowering the effective tax rate for this bracket from 42.74% to 39%.

How Nirmala Sitharaman Can Make the New Tax Regime Attractive?

Considering the rise in the cost of living, particularly in the metros, the finance minister should consider increasing the Standard Deduction limit to Rs 1.50 lakh.

For salaried individuals, the standard deduction is a crucial component that reduces their taxable income, offering immediate financial relief, particularly for the middle class.

This is necessary given that the government has not bothered to increase children's education and hostel allowance for decades. Also, the fact that the government hasn't raised the deduction under Section 80D for health insurance premiums paid and has not made it so far available under the New Tax Regime.

[Read: Why Nirmala Sitharaman Needs to Increase Section 80D Deduction in the Union Budget 2025-26]

It is important for the finance minister, Ms Sitharaman to keep in mind that the current New Tax Regime is devoid of many of the deductions available under the old tax regime. In simple terms, the benefits of the New Tax Regime come at the cost of giving up various tax-saving exemptions and deductions available in the old tax regime.

Some of the most popular exemptions and deductions that are not currently available under the new tax regime are...

• House Rent Allowance (HRA) - to claim HRA benefits extended by employers

• Leave Travel Allowance (LTA) - available for travel expenses incurred by the taxpayer and their family during eligible trips.

• Section 80C - which allows deductions of up to Rs 1.5 lakh in a financial year for making tax-saving investments

• Section 80D - which allows taxpayers to claim deductions for health insurance premiums paid for themselves, their spouse, children, and dependent parents.

Hence, another significant change that could make the new tax regime more attractive is the inclusion of HRA deductions, which are currently available only under the old tax regime.

For salaried individuals, especially those who relocate to different cities for work, HRA plays a critical role in managing rental expenses. With urban housing costs rising, an increasing number of professionals are opting to stay on rent or lease near their workplaces.

Allowing HRA deductions under the new tax regime would acknowledge the realities of modern employment and make the system better aligned with the needs of salaried individuals, especially those in metro cities where housing costs are significantly higher.

If the upcoming Union Budget 2025, to be presented on February 1, meets these expectations, it could leave the taxpayers opting for the new tax regime with higher disposable income.

This financial surplus could translate into more savings and increased consumer spending on goods and services, further driving demand in critical sectors like retail, real estate, and consumer goods.

Increased demand in these industries often leads to higher production, job creation, and overall economic growth.

Similarly in the interest of the health insurance industry at large and enhancing health insurance penetration, the deduction for health insurance premiums paid by individuals also needs to be extended under the New Tax Regime (which so far is available only under the old tax regime).

Doing this is necessary given that the New Tax Regime is made the default regime from FY 2023-24 for taxpayers and is potentially intended at phasing out the old tax regime.

Why Should the New Tax Regime Be Encouraged?

The tax computation under the New Tax Regime is fairly simple making even a novice compute his/her tax after the deductions available.

Moreover, unlike the old tax regime, where taxpayers had to meticulously maintain documentation and provide proof for claiming deductions or exemptions, the new tax regime reduces such requirements.

From the government's perspective, the new tax regime brings significant administrative benefits. By removing a multitude of exemptions and deductions, but having only the most necessary ones, the New Tax Regime potentially simplifies the tax administration hassles for the government.

Moreover, as mentioned earlier, under the New Tax Regime, individuals have greater freedom to allocate the disposal income based on their personal priorities.

Instead of feeling compelled to invest in tax-saving instruments with potentially restrictive conditions, taxpayers can make decisions aligned with their liquidity needs, risk tolerance, or short-term financial goals.

A straightforward system also reduces opportunities for tax evasion and misuse of exemptions, ensuring more accurate and fair revenue collection. Also, the clarity and ease of the framework encourage voluntary compliance among taxpayers, particularly those who previously found the old system daunting or complex.

To Conclude...

With the Union Budget 2025-26 around the corner, we hope the Modi 3.0 coalition government and finance minister Ms Nirmala Sitharaman take these budget expectations into consideration.

Reforms like increasing the standard deduction limit to Rs 1 lakh, allowing HRA deductions as well as the deduction for health insurance premiums paid under the new tax regime have the potential to make it a more attractive and practical choice for income tax assessees, particularly salaried individuals.

That being said, the choice between the old and new tax regimes ultimately depends on the individual's circumstances and preferences.

Taxpayers must conduct a thorough analysis of their income and evaluate the eligible deductions and exemptions available to them.

Those who wish to take full advantage of the deductions and exemptions for eligible investments, health insurance premiums paid, and are repaying home loans may find the old tax regime more beneficial.

Ultimately, it is vital to calculate your tax liability under both regimes, taking into account all potential savings and exemptions, before making an informed decision.

[Read: Is the Revised New Tax Regime Truly Beneficial for You? Find Out Here...]

A careful evaluation can ensure that you not only optimise your tax savings but also align your choice with your financial goals.

Be thoughtful in your approach.

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