Proposals related to Personal Income Tax

The Budget 2025 brings significant reforms to the personal income tax structure, aiming to provide relief to taxpayers while enhancing compliance. Key proposals include the rationalisation of income tax slabs under the new regime, an increased tax rebate limit under Section 87A, and an extended time frame for filing updated returns. Additionally, the budget simplifies tax provisions related to self-occupied properties, introduces clarity on taxation of Unit Linked Insurance Policies (ULIPs), and extends tax benefits for contributions to the NPS Vatsalya scheme. Further, exemptions have been proposed for withdrawals from the National Savings Scheme.

Rationalisation of Income Tax Rates and Slabs

Income Tax slabs for Individuals for AY 2026-27 are rationalised in the New Regime. The revised Tax slabs are given in the Table given below:

Income Limit for Tax Rebate under Section 87A is proposed to be increased from Rs 7 lakhs to Rs 12 Lakhs in the New Regime. In view of the above, the Tax Rebate will increase from Rs 25,000 to Rs 60,000.

There will be no income tax payable up to income of Rs 12 lakh (i.e. average income of Rs 1 lakh per month other than special rate income such as capital gains) under the New Regime. This limit will be Rs 12.75 lakh for salaried taxpayers after considering a standard deduction of Rs 75,000.

A taxpayer in the New Regime with an income of Rs 12 lakh will get a benefit of Rs 80,000 in tax (which is 100% of tax payable as per existing rates). A person having an income of Rs 18 lakh will get a benefit of Rs 70,000 in tax (30% of tax payable as per existing rates).  A person with an income of Rs 25 lakh gets a benefit of Rs 1,10,000 (25% of his tax payable as per existing rates).

Extending the Time Limit to file the Updated Return

Sub-section (8A) of section 139 of the Act relates to the furnishing of updated return. As per the present provisions, an updated return can be filed up to 24 months from the end of the relevant assessment year. The facility of updated return has promoted voluntary compliance against payment of additional income tax of 25% of aggregate of tax and interest payable for updated return filed up to 12 months from the end of the relevant assessment year. For updated returns filed after the expiry of 12 months and up to 24 months from the end of the relevant assessment year, the additional income tax of 50% of aggregate tax and interest is to be paid.

With a view to further nudging voluntary compliance, it is proposed to amend the said sub-section so as to extend the time limit to file the updated return from the existing 24 months to 48 months from the end of the relevant assessment year. The rate of additional income tax payable for updated returns filed after the expiry of 24 months and up to 36 months from the end of the relevant assessment year shall be 60% of the aggregate of tax and interest payable. The additional income tax payable for updated returns filed after the expiry of 36 months and up to 48 months from the end of the relevant assessment year shall be 70% of the aggregate of tax and interest payable.

These amendments will take effect from the 1st day of April 2025.

The annual value of the self-occupied property is simplified

Presently tax-payers can claim the annual value of self-occupied properties as nil only on the fulfilment of certain conditions. Considering the difficulties faced by taxpayers, it is proposed to allow the benefit of two such self-occupied properties without any condition.

Bringing clarity in income on redemption of Unit Linked Insurance Policy

It is proposed to rationalise the provisions for unit-linked insurance policies, so as to provide that,–

• ULIPs to which exemption under clause (10D) of section 10 does not apply, is a capital asset [clause (14) of section 2];
• the profit and gains from the redemption of ULIPs to which exemption under clause (10D) of section 10 does not apply, shall be charged to tax as capital gains [sub-section (1B) of section 45]; and
• ULIPs to which exemption under clause (10D) of section 10 does not apply shall be included in the definition of equity-oriented fund [clause (a) of Explanation to section 112A].

Deduction under section 80CCD for contributions made to NPS Vatsalya

The NPS Vatsalya Scheme, officially launched on 18 September 2024, enables parents and guardians to start a National Pension Scheme (NPS) account for their children. This savings-cum- pension scheme is designed exclusively for minors and will be operated by the guardian for the exclusive benefit of the minor till they attain majority. When a minor attains 18 years, the account will continue to be operational, transferred to the child's name with the accumulated corpus and will be shifted into the NPS-Tier 1 Account - All Citizen Model or other non-NPS scheme account.

It is proposed to extend the tax benefits available to the National Pension Scheme (NPS) under Section 80CCD of the Act to the contributions made to the NPS Vatsalya accounts, as follows:

• A deduction to be allowed to the parent/guardian’s total income, of the amount paid or deposited in the account of any minor under the NPS to a maximum of Rs 50,000/- overall as mandated under sub-section (1B) of section 80CCD;
• The amount on which deduction has been allowed under sub-section (1B) of section 80CCD or any amount accrued thereon, will be charged to tax when such amount is withdrawn, in the case where the deposit was made in the account of a minor, and
• The amount on which deduction has been allowed and is received on closure of the account due to the death of the minor shall not be deemed to be the income of the parent/guardian;

The NPS Vatsalya Scheme also allows for partial withdrawal from the minor’s account to address certain contingency situations like education, treatment of specified illnesses and disability (of more than 75%) of the minor. Accordingly, it is also proposed to insert a clause (12BA) in section 10 of the Act, which provides that any income received on partial withdrawal made out of the minor’s account, shall not be included in the total income of the parent/guardian to the extent it does not exceed 25% of the amount of contributions made by him and in accordance with the terms and conditions, specified under the Pension Fund Regulatory and Development Authority Act, 2013 (23 of 2013) and the regulations made thereunder.

Exemption to withdrawals by Individuals from the National Savings Scheme from taxation

It is proposed to amend section 80CCA to provide exemption to the withdrawals made by individuals from these deposits for which deduction was allowed, on or after 29th day of August, 2024. This exemption is provided to the deposits, with the interest accrued thereon, made before 01.04.1992 as these are the amounts in respect of which a deduction has been allowed.

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