Budget 2025: The Evolving Landscape of India's Income Tax Regimes
Every year, as the Union Budget approaches, millions of Indian taxpayers eagerly await the Finance Minister's speech with one burning question: Will my tax burden finally reduce this year? This anticipation stems from the populist impact that tax relief measures typically carry, making the Budget presentation a crucial event for both the common man and middle-class taxpayers.
The Genesis of a Simplified Tax System
Finance Minister Nirmala Sitharaman, who will present her ninth consecutive Budget on February 1, originally introduced the new income tax regime back in 2020. In her landmark Budget speech that year, she explained the compelling rationale behind this revolutionary change.
The Income Tax Act had become riddled with various exemptions and deductions, she noted, making compliance by taxpayers and administration by tax authorities an increasingly burdensome process. It had reached a point where navigating the income-tax law without professional assistance seemed almost impossible for ordinary citizens.
Thus emerged the new, simplified income tax regime designed to provide significant relief to individual taxpayers. The fundamental premise was straightforward: offer reduced tax rates to those willing to forgo certain deductions and exemptions, thereby streamlining the entire taxation process.
The Evolutionary Journey of Tax Slabs
When first introduced in FY 2020-21, the new tax regime featured a progressive structure that immediately caught taxpayers' attention:
- Income up to ₹2.5 lakh: Exempt
- ₹2.5-5 lakh: 5% tax rate
- ₹5-7.5 lakh: 10% tax rate
- ₹7.5-10 lakh: 15% tax rate
- ₹10-12.5 lakh: 20% tax rate
- ₹12.5-15 lakh: 25% tax rate
- Above ₹15 lakh: 30% tax rate
The most significant departure from the old regime was evident in the highest tax bracket. Under the new system, the 30% tax slab applied only to incomes exceeding ₹15 lakh, compared to just ₹10 lakh under the traditional system.
Finance Minister Sitharaman illustrated the potential benefits with a compelling example: A taxpayer earning ₹15 lakh annually without availing any deductions would pay only ₹1,95,000 under the new regime versus ₹2,73,000 under the old system—a substantial saving of ₹78,000. Even taxpayers claiming deductions up to ₹1.5 lakh under Chapter VI-A of the Income Tax Act would still find themselves better off under the new framework.
Continuous Refinements and Enhancements
Over subsequent years, the government introduced several substantial improvements to the new tax regime. The Union Budget 2023 marked a particularly significant milestone with these key modifications:
- The basic exemption limit under the new regime increased to ₹3 lakh
- A standard deduction benefit of ₹50,000 was introduced
- The Section 87A rebate limit under the new regime rose to ₹7 lakh, meaning those earning up to this threshold would pay zero tax
- The highest surcharge rate reduced from 37% to 25%, lowering the maximum effective tax rate from 42.74% to 39%
- The new income tax regime became the default option for taxpayers
The interim budget of 2024 further enhanced the standard deduction under the new regime to ₹75,000, while last year's Budget brought what many called the ₹12 lakh tax-free bonanza. With higher rebates implemented, tax liability on incomes up to ₹12 lakh was effectively reduced to zero.
Explaining this remarkable progression, Sitharaman highlighted: Right after 2014, the 'Nil tax' slab was raised to ₹2.5 lakh, which was further increased to ₹5 lakh in 2019 and to ₹7 lakh in 2023. This trajectory reflects our government's trust in middle-class taxpayers. I am pleased to announce that there will be no income tax payable up to ₹12 lakh under the new regime.
Quantifying the Savings: A Comparative Analysis
The tax benefits under the new regime have become increasingly substantial when compared to the old system. Consider these compelling figures that demonstrate the evolving savings landscape:
For an annual income of ₹10 lakh:
- Old regime (consistent since FY21): ₹75,400
- New regime (FY21): ₹78,000
- New regime (FY24): ₹54,600
- New regime (FY25): ₹44,200
- New regime (FY26): NIL
For an annual income of ₹20 lakh:
- Old regime (consistent since FY21): ₹366,600
- New regime (FY21): ₹351,000
- New regime (FY24): ₹296,400
- New regime (FY25): ₹278,200
- New regime (FY26): ₹192,400
This translates to savings of ₹174,200 in FY26 for those opting for the new regime instead of the old at this income level.
For an annual income of ₹40 lakh:
- Old regime (consistent since FY21): ₹990,600
- New regime (FY21): ₹975,000
- New regime (FY24): ₹920,400
- New regime (FY25): ₹902,200
- New regime (FY26): ₹787,800
Here, the savings amount to ₹202,800 in FY26 for taxpayers choosing the new regime.
Expert Perspectives and Future Outlook
Amarpal Chadha, Tax Partner at EY India, provides valuable insight into this transformation: Over the past few years, the new tax regime has clearly boosted the take-home pay of most salaried taxpayers due to the rising basic exemption limits and reduced slab rates. In FY 2020-21, for an income of ₹10 lakh, the tax liability under the new tax regime was slightly higher compared to the old tax regime. However, over the subsequent five years, the reforms have reversed this picture completely.
He further elaborates: Now, if we compare savings under the new tax regime over the six-year period from FY 2020-21 to FY 2025-26, savings have risen significantly—around ₹78,000 at an income of ₹10 lakh, ₹1.58 lakh at ₹20 lakh and ₹1.87 lakh at ₹40 lakh. With substantial taxpayers adopting the default/new tax regime, further slab adjustments in Budget 2026 could accelerate this trend considerably.
The migration to the new regime is already evident in filing patterns. Over 70% of tax returns filed for Assessment Year 2024-25 utilized the new regime, and tax experts anticipate this percentage will increase further in the current financial year, particularly with the attractive ₹12 lakh zero-tax threshold.
However, certain taxpayer segments continue to benefit from the old regime, especially those claiming substantial House Rent Allowance or maintaining significant home loan obligations. For incomes exceeding ₹12 lakh, and particularly above specific deduction thresholds, the old regime may still prove more advantageous at various salary levels.
Looking ahead, industry observers suggest the government might consider introducing popular deductions like Section 80C and home loan interest benefits into the new regime to further incentivize savings and housing investments. As Budget 2025 approaches, all eyes remain on potential refinements that could make India's tax landscape even more taxpayer-friendly.
