Union Budget 2025-26: 25% income tax slab, higher rebate on the cards

Union Finance Minister Nirmala Sitharaman is likely to announce significant changes to income tax slabs under the new tax regime in the upcoming 2025-26 Union Budget on February 1. These could offer substantial relief to salaried taxpayers earning up to Rs 20 lakh annually.

 

The government is said to be weighing two options: Making annual income up to Rs 10 lakh entirely tax-free or introducing a new 25 per cent tax slab for income between Rs 15 lakh and Rs 20 lakh. Currently, income above Rs 15 lakh is taxed at the highest rate of 30 per cent.

 

“We are evaluating both options. If our budget allows, we may implement both measures — making income up to Rs 10 lakh tax-free and introducing a 25 per cent slab for income between Rs 15 lakh and Rs 20 lakh,” a government source said. The government, the source said, is prepared to absorb the impact of a revenue loss of Rs 50,000 crore to Rs 1 trillion to provide income-tax relief.

 

The anticipated tax relief is expected to boost urban consumption at a time when GDP growth has slowed down (growth in Q2FY25 had declined to a seven-quarter low of 5.4 per cent).

 

This would not be the first time the Finance Minister has sought to ease tax burden. In 2023, she raised the Section 87A rebate under the new tax regime, exempting individuals earning up to Rs 7 lakh annually from income tax, provided they forgo most deductions.  

Sources suggest the upcoming Budget may raise the rebate further, potentially making income up to Rs 10 lakh tax-free under the new regime.

 

Currently, with the Rs 75,000 standard deduction in place, individuals earning up to Rs 7.75 lakh effectively have no tax liability.

 

Akhilesh Ranjan, advisor with PwC and former member of the Central Board of Direct Taxes (CBDT), said it makes more sense for the government to introduce a 25 per cent slab rate for those with incomes between Rs 15 lakh and Rs 20 lakh, as giving more money in their hands will boost consumption. “These are the people who buy consumer durable products like fridge, television, etc,” he noted.

 

According to Anil K Sood, professor at the Institute for Advanced Studies in Complex Choices (IASCC), a 30 per cent tax rate for incomes just above Rs 15 lakh per annum is unreasonable and that the government should give relief to the salaried class but without tinkering with the existing incentives. "The government is unnecessarily obsessed with the fiscal deficit target. On the capex side, it is budgeting but not spending. For example, the National Highways Authority of India has the funds but it is not spending the money. The money is being used to repay loans,” Sood argued.