As India gears up for Budget 2025, all eyes are on Finance Minister Nirmala Sitharaman and her upcoming announcement on potential income tax cuts aimed at benefiting salaried taxpayers. Set to be unveiled on February 1, the Budget is expected to bring key reforms, with some proposals already being discussed widely by tax experts and the media. Among the most anticipated changes are adjustments to the income tax slabs, particularly the introduction of inflation-adjusted exemptions that could make the tax system more equitable for taxpayers facing the pressure of rising living costs.
Inflation-Adjusted Basic Exemption: A Fairer Tax System
One of the major proposals that has been generating significant discussion is the potential for the basic exemption limitto be linked to inflation. This would involve adjusting the income tax slabs in line with inflationary pressures, aiming to alleviate the growing financial burden on taxpayers whose nominal incomes increase due to inflation, rather than real wage growth.
With inflation steadily eroding purchasing power, many taxpayers and economists have voiced support for inflation-adjusted tax slabs. According to Dr. Surana, an economist, this adjustment would be a much-needed reform to protect taxpayers from being pushed into higher tax brackets simply because of inflation-driven increases in their salaries. The idea is that as the cost of living rises, tax brackets should also adjust to reflect these economic changes, ensuring taxpayers’ real income is not disproportionately taxed.
In an interview with The Hindu Businessline, Rakesh Nangia, Managing Partner at Nangia & Co LLP, suggested that taxpayers might see tax slabs reduced in the new regime and anticipated the proposal for an inflation-adjusted basic exemption. This could allow taxpayers to retain more of their income, reflecting the reality of higher living costs.
Standard Deduction Linked to Inflation
Alongside the proposed changes to the income tax slabs, there is also a strong push to adjust the standard deduction for salaried individuals to account for inflation. The Institute of Chartered Accountants of India (ICAI) has recommended that the government consider increasing the standard deduction in line with inflation and the rising purchasing power of salaried individuals.
Currently, salaried taxpayers can claim a standard deduction of ₹75,000 under the new tax regime and ₹50,000 under the old regime. However, the ICAI believes that these figures no longer adequately reflect the growing cost of living, especially for employees facing higher day-to-day expenses. By linking the standard deduction to the cost inflation index, the government could ensure that salaried individuals are not unduly burdened by the effects of inflation on their disposable income.
Experts argue that an inflation-adjusted standard deduction would offer meaningful relief to taxpayers, aligning the tax system with the current economic reality. This, in turn, could foster greater compliance with tax rules, as salaried individuals would feel that the tax regime is more aligned with their real financial situation.
Impact on Taxpayer Compliance and Perception
The potential introduction of inflation-adjusted income tax slabs and standard deductions represents a crucial step towards ensuring fairness in India’s tax system. CA Dr. Suresh Surana emphasized that such reforms would strengthen equity within the taxation framework by recognizing the impact of inflation on taxpayers’ real incomes. More importantly, these changes could lead to improved public perception of the tax system, which has often been criticized for its perceived lack of fairness.
By addressing inflation’s impact on taxpayers’ financial well-being, the government would not only support the middle class but also encourage greater tax compliance, as individuals would feel more positively about the system. However, experts also caution that while these adjustments are necessary, the government must carefully consider the implementation challenges and the fiscal impact of such changes to ensure they are sustainable in the long term.
What to Expect in Budget 2025
As the date for Budget 2025 approaches, taxpayers and economists alike are hopeful that these proposed changes will make a meaningful difference in their financial lives. With rising inflation putting pressure on household budgets, the introduction of inflation-adjusted exemptions and standard deductions could go a long way in making the tax system more responsive to the current economic climate.
These reforms, if implemented, would represent a significant shift in how India’s income tax system functions, ensuring that tax rates reflect the real financial challenges faced by taxpayers. All eyes will be on Finance Minister Nirmala Sitharaman as she addresses these concerns in her Budget 2025 speech—a move that could reshape India’s tax landscape for years to come.
