In a major relief for taxpayers in the Budget 2025, Finance Minister Nirmala Sitharaman announced that under the new tax regime, income up to Rs 12 lakh (Rs 12.75 lakh with standard deductions) will be tax-free. New tax slabs have also been introduced, with rates ranging from 10% to 30% for higher income brackets. A new direct tax code will be launched next week to simplify compliance, scrap financial year confusion, and introduce a 5% tax on LIC income. The option to choose between old and new regimes will be removed, making this a historic shift in India’s tax system!
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The Indian government has announced a major change in income tax rules, bringing relief to many taxpayers. Union Finance Minister Nirmala Sitharaman, while presenting the Union Budget 2025, declared that under the new tax system, people earning up to Rs 12 lakh will not have to pay any income tax. If we include standard deductions, the tax-free limit extends up to Rs 12.75 lakh.
This announcement was met with loud cheers and desk-thumping by BJP MPs, including Prime Minister Narendra Modi. Along with this, the Finance Minister also introduced new income tax slabs, applicable only under the new regime.
REVISED TAX SLABS
According to the revised tax slabs:
- For income between Rs 8 lakh and Rs 12 lakh, the tax rate will be 10%.
- For income between Rs 12 lakh and Rs 16 lakh, the tax rate will be 15%.
- For income between Rs 16 lakh and Rs 20 lakh, the tax rate will be 20%.
- For income between Rs 20 lakh and Rs 25 lakh, the tax rate will be 25%.
- For income above Rs 25 lakh, the tax rate will be 30%.
During the announcement, Nirmala Sitharaman emphasized that this step will “substantially reduce the tax burden on the middle class and leave more money in their hands.” She also explained that this would boost household consumption, encourage savings, and increase investments.
Another major revelation in the budget was that a new direct tax code will be introduced next week. This code aims to simplify tax compliance for individuals.
Just a day before the budget announcement, sources had informed media that this new tax code was being considered.
NEW DIRECT TAX CODE
The idea of a new direct tax code was first discussed when the Finance Minister presented the full 2024-25 budget in July. At that time, she had stated that the goal was to make income tax laws simpler and easier to understand. The government also plans to reduce the size of the Income Tax Act, 1961, by a massive 60%.
The Income Tax Act, 1961, is a detailed law that covers personal tax, corporate tax, taxes on securities transactions, wealth, and gifts. Currently, it consists of 23 chapters and 298 sections.
EXPECTED CHANGES
One of the biggest expected changes in the new tax code is the removal of the financial year (FY) and assessment year (AY) system, which has often caused confusion. Additionally, the government may introduce a 5% tax on income from insurance policies issued by the Life Insurance Corporation (LIC), which were earlier not taxed under the 1961 Act.
Another major change could be the standardization of tax on dividend income. Right now, dividend income is taxed at slab rates, but under the new system, it may be fixed at 15%.
However, the most important change in the new tax code is that it will not allow taxpayers to choose between the old and new tax regimes. This means all taxpayers will have to follow the new system once it is implemented.
These reforms are aimed at making tax compliance easier and ensuring a more streamlined and transparent tax structure in India.
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